Commercial Loans and Fun Blog

This lesson is probably the third most important lesson I will ever teach you.

You should focus-focus-focus your commercial mortgage brokerage practice on your local commercial real estate market. 

Why?  There are several reasons:

1. Commercial mortgage brokerage is all about relationships.  Commercial lenders close deals for their friends (best brokers).  Every commercial mortgage loan ever written had a few black hairs.  Whether a loan officer chooses to fight with Loan Committee in order to push through your deal depends to a very great extend on whether he likes you.
   
   
2. It is much easier to develop a relationship with a lender if you can bring him your packages in person.  You can take the guy to lunch.  You can bring his female assistant flowers and candy (very clever trick once taught to me by the richest commercial mortgage broker in history).  You can play golf with your lender.  You can invite him to your home for dinner or to watch the Super Bowl.  Never forget that commercial lenders close loans for their friends.
   
   
3. You should personally inspect every property that you try to finance.  If you do, you can tell him stuff like, “Bob, I too thought this property was in a tough part of town, but when I drove out there with my wife the other day, I was really impressed by all of the renovation and gentrification going on in the area.”  It’s economically infeasible to inspect commercial properties located more than two hours from your office, so why not focus your marketing on local referral sources (bankers, commercial realtors, etc.) so that the deals they will refer to you will also be local?
   
   
4. The single best way to receive commercial mortgage referrals is to personally call on bankers.  Therefore you should be regularly calling on bankers located closed to your office so that they can refer you local deals.
   
   
5. Commercial real estate brokers are also great referral sources, and it is easy to meet them because their “For Lease” and “For Sale” signs are posted on local commercial buildings all over town.   Since they are local, their listings will also usually be local.  So stay local!
   
   
6. Now if you get a good commercial lead on a property outside of your immediate area, then, by all means, work it.  If you meet a good potential referral source – say, a banker from another state at some lending conference – then, by all means, add him to your email list and mailing list.   I’m just saying that you want the great majority of the potential referral sources on your email list and your snail mail list to be local. 

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When I was around twelve years old, my parents took me to a theater to see an action movie about the ancient Mayans.   I have never forgotten the terrifying scene where the priests dragged a lovely, young Indian maiden up the 200 steps of the their stone pyramid and held her down over a stone altar.  Then an ugly old priest looked up at the Sun God, chanted some nonsense, and drove his knife into the terrified maiden’s chest.  He carved for a minute or two, and then he held up her still-beating heart for all of the people to see.  Yikes!  I was much too young to see such real-life violence.

While that movie scene traumatized me for life, it also helped me to later develop an important theory about commercial real estate finance.

Sacrificial Virgins Theory:  In commercial real estate finance, sometimes a new commercial mortgage broker has to sacrifice five lovely packages on the altar of a new lender before the lender will finally start to seriously look at the broker’s deals.

The commercial real estate loan officers who handle the really large loans for banks and life companies are often swamped with calls.  To handle the volume, they usually turn down almost everything brought to them by newbie mortgage brokers.

When they actually want to close a deal, they work with one of their best brokers, who have been carefully trained to screen out all of the weak deals.  Therefore, when one of these best brokers (aka: Big Boys) calls the lender, the lender knows that his best broker probably has a very good deal in hand.

When a normal mortgage broker calls the bank or life company, the loan officer will listen politely, until he discovers the first black hair on the deal.  Then he will turn down your deal.  Since every commercial loan ever made has a black hair, this means you will always be turned down.  It doesn’t matter how good your deal is.  The loan officer just wants you to go away.

So how do you become a best broker?  You must first sacrifice five packages to this loan officer.  Suppose you have a $5 million office building refinance on your desk.  You can either take the loan to Bank A, a lender with whom you have a relationship, or to Life Company B, a new lender with great rates whom you would like to develop into a regular lender.  To whom should you take your package?

You should take the package to both lenders! 

“But, George, what if they both lenders issue a proposal?”

It won’t happen.  Why?  Because Life Company B is going to turn down your first five deals anyway.  You can therefore use your current package as a sacrificial virgin.

After you have sacrificed five lovely packages on the altar of this lender, he will start to realize that you are a survivor and a producer.  He will then start to train you to become one of his best brokers.

The ultimate irony is that you may someday drag in to this lender a rump-ugly carcass of a deal – a deal that could not hold a candle to the five lovely virgins you sacrificed earlier - and the lender will approve your deal!

Welcome to commercial real estate finance.

If you found this article to be instructive, I strongly encourage you to subscribe to our blog via email.  To get a copy of each new training blog article, without having to remember to come back, please fill in your email address in the space provided on the right.

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We have talked in depth about why large  commercial loans are so difficult to close.  First of all, large loans have to almost perfect because so many executives have to sign off on the deal.

In addition, most of the large commercial loans we see as mortgage brokers have already been turned down by several banks.  The loan may have been turned down because borrower’s credit was flawed, the borrower lacked enough equity in the property or a large enough cash down payment, the developer was not contributing enough equity into the construction deal, or the borrower’s net worth was too small when compared to the loan amount.  Remember, if a commercial real estate investor is really clean and really strong, he usually has a half-dozen different bankers in his back pocket.

Lastly, even if a mortgage broker is lucky enough to have a perfect large commercial loan in hand, he will often still fail to place the loan because he is not in the Big Boy clique.  Remember, the bank loan officers who close the really large commercial loans are very choosy about the brokers with whom they will work.  They’ll politely take your call, but the moment they discover a black hair – and every deal has a black hair – they will often just shoot you out of the water.

All these things being said, however, a few large commercial loans do sometimes close.  What allows these large loans to close?  Here’s my observation:

Large commercial loans only close when the
mortgage broker doesn’t need the commission.

If the mortgage broker has plenty of dough in the bank, and if he has a huge pipeline of small and/or high-probability commercial loans in processing, the mortgage broker will sound cool, relaxed, funny, and knowledgeable when he presents his large loan to his lender.

But if the mortgage broker needs the large loan to close, the battle is already lost.  The mortgage broker will sound nervous and needy on the phone, so the bank loan officer will already be assuming his “No!” position.

The wise mortgage broker will therefore focus his time on building a huge pipeline of smaller and/or high-probability commercial loans before spending a lot of time trying to close a single large loan.  I’m not saying that you shouldn’t work on a large commercial loan if it falls in your lap.  I’m just saying that you shouldn’t neglect the smaller commercial deals in your pipeline because they are probably the only deals that will close.

If you found this article to be instructive, I strongly encourage you to subscribe to our blog via email.  To get a copy of each new training blog article, without having to remember to come back, please fill in your email address in the space provided on the right.

Lastly, if you're a buddy or a former student of mine, would you please do me the great kindness of hitting the Like button, the Google+1 button, and the Linked-In Share button above.  Thanks so much.  :-)

 

There are a lot of different ways to structure a commercial loan in order to close a tougher deal. Here are just a few:

1. Carrying Back a Second Mortgage on a Different Property. Suppose a seller is motivated to sell his property, and your buyer lacks the full 35% cash down payment often required by banks nowadays. The typical bank will also prohibit junior financing. Here's a trick: Get the seller to carry back his second mortgage on a different property owned by the buyer, say, a rental home or his vacation home.
   
   
2. Subordination for a Partial Paydown.  At Blackburne & Sons, we use this trick all of the time.  Suppose a former seller has a $1 million ballooning note.  Because commercial real estate has fallen about 45% since the start of the Great Recession, perhaps the largest prudent new commercial loan that can be made is just $600,000. Many times the former seller will take just $600,000 now and will subordinate his remaining $400,000 as a second mortgage.  Most banks today will not allow junior financing, but Blackburne & Sons will!
   
   
3. Blanket Other Collateral.  If the deal is close, frequently a commercial lender can be convinced to do the deal if he can also have a second mortgage on the borrower's personal residence and/or another property.
   
   
4. Bring In an Outside Personal Guarantor.  If the borrower's credit is flawed or his net worth is small compared to the loan request, you can often help a commercial lender to get comfortable by bringing in the borrower's father, brother, or friend to personally guarantee the loan.
   
   
5. Have the Borrower Bring Cash to the Closing Table.  Let's suppose the borrower has a $720,000 ballooning loan, but he can only qualify for a $600,000 refinance.  The borrower may be able to raise the remaining $120,000 by selling some stocks, liquidating his IRA, or refinancing his house.
   
   
6. Convince the Bank to Take a Discounted Pay Off (DPO).  Banks have never been more willing to accept 65 cents on the dollar in order to get a commercial loan off the books.  Most banks are under heavy pressure from their regulators to clear their troubled commercial loans off the books.  At Blackburne & Sons, we have seen a great many banks accept DPO's recently.  We love to help borrowers pay off banks at a discount.
   
   
7. Sometimes the Borrower Just Has to Accept a Smaller Loan.  Every borrower wants max cash, but sometimes he just needs to be convinced that you are getting him the most cash that is possible.

If you found this article to be instructive, I strongly encourage you to subscribe to our blog via email.  To get a copy of each new training blog article, without having to remember to come back, please fill in your email address in the spcae provided on the right.

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Most commercial mortgage brokers devote less than 15% of their time to marketing for commercial loans. They devote the vast bulk of their hours to trying to place a $4 million loan on a money-losing bowling alley in some hollowed-out city or a $20 million construction loan on a new resort in Belize.

Before I give you the surprising answer, it is critical that you understand this important fact:

The typical commercial real estate loan officer working for a life company, a bank, or a hard money lender will take at least 40 to 50 phone inquiries and will underwrite 10 to 15 loan packages for every loan he approves.*

Commercial real estate lending therefore is an immense sifting and sorting process.  The value you add as a commercial mortgage broker is to help your lenders sift and sort through dozens and dozens of loan requests to find that one deal that makes sense.

Your job is NOT to grab ahold of the first loan request you find - say, a $4 million land loan in the desert of California - and then spend 20 precious working hours trying to place a deal that is not do-able.  Your job is to say to your borrower or realtor, "I'm sorry, Bob, but in today's market I'm not sure anyone will finance this project."

Therefore, it is my opinion that the typical commercial mortgage broker should devote SIXTY PERCENT (60%) of his time to marketing for commercial loans!

When a lead call comes in, you should quickly qualify it over the phone.  If this is a purchase money deal, how much cash is the borrower putting down?  If this is a refinance, and he needs a 75% LTV loan, or higher, to pay off his existing lender, kill the deal.  What is the borrower's net worth compared to the loan size?  It should be at least equal.  Got an auto mechanic with a $200,000 net worth trying to buy a $3 million apartment building, kill the deal.

"But George, what if I don't have a single deal in processing?"

Then spend every possible minute calling, writing, or visiting nearby bankers and commercial real estate brokers.  Write newsletters and get them out.  Go to mixers.  Schmooze.

Do not - do not!!! - waste your precious time trying to place pipedream deals.  It is far better to turn away one deal in forty that might have been do-able than to waste precious marketing time trying to pull off a miracle on a goofy loan.  Your policy should be, "If a deal is not obviously a winner, I'm turning it down and working on my marketing."

You should be absolutely confident that every deal in your processing pipeline is do-able.  And if you don't know how to underwrite commercial loans perfectly, learn your profession!  You can learn commercial real estate finance using our 9-hour video training program.  It costs only $499 to learn a profession.  Compare that to what you paid for your college tuition.

But I am not writing to you today to sell you videos.  I'm writing to drill something vitally important into your head.  Your job is to sift and sort through the thousands of loan packages floating around the marketplace to find the small handful of deals that are do-able.  If you don't have scores and scores of potential borrowers with whom to speak, then spend your time on marketing for commercial loans!  You should probably be spending 60% of your time on marketing.