Let me set the stage here. You’re a commercial mortgage broker. A potential borrower calls his own bank asking for a commercial real estate loan, but the bank is forced to turn him down. Fortunately, the kindly banker recommends your commercial mortgage company and suggests to the borrower that he call you.
So your phone rings, and the borrower tells you that he needs a commercial real estate loan. You ask for the details, and he share them with you. He says, “I need a $700,000 refinance of my industrial building in Chicago, Illinois.”
Now your commercial loan office (if you are smart, a bedroom in your home) is located 200 miles away in Minneapolis, Minnesota; however, you are confident that you can find a lender to make his loan.
Question: How do you quote the loan?
Now you have several commercial banks that have closed commercial real estate loans for you in Minnesota, and they usually quote you between 4.5% to 4.75%, 1 point, 25 years amortized, 10 years due, with one rate readjustment (based on a spread over Treasuries) after five years, and a prepayment penalty of 3% in year one, 2% in year two, and 1% thereafter.
George’s Answer:
As a commercial mortgage broker, you should quote your borrower a very specific rate and term, even though you might not yet have a specific lender picked out for the deal.
Now I do not want you to lie and issue some lowball quote for a loan that you suspect would be impossible to deliver. No-no-no!
I just want you to make a detailed, specific quote based on the knowledge that most banks throughout the country offer commercial real estate loans at roughly the same rates and terms. Therefore, if your local banks in Minnesota are quoting 4.5% to 4.75% for a loan that is amortized over 25 years and due in 10 years, you can be reasonably sure that the banks in Chicago will be quoting pretty much the same terms.
So you might quote the borrower: 4.625%, 2 points (one of those two points is your fee), 25 years amortized, 10 years due, with a rate readjustment after five years, and a prepayment penalty of 3% in year one, 2% in year two, and 1% thereafter.
“Why is it so important that my commercial loan quote be so precise and exact? Why can’t I just give a range?”
When an experienced commercial property investor calls his bank, the bank loan officer doesn’t generally give him a loan quote with a very wide variance. The banker doesn’t quote him, “You rate will be between 4.5% and 12%.” No, the banker is usually far more precise. He might say that your rate will be between 4.5% and 4.75%, but that’s about as much variance as he typically puts in the quote.
If you give your borrower a quote of between 4.5% and 12%, the borrower will know that you are just a broker. You don’t want to come across as “just a broker”. I don’t want you to lie, and if the borrower asks you directly if you are just a broker, you tell him the truth.
Nevertheless, the wise commercial loan salesman will come across confidently and specifically, as if he has been representing that bank in Chicago for a decade. (Remember, at this point we don’t know what bank in Chicago might make this loan; but we do know that most banks across the country quote their commercial real estate loans at roughly the same rates and terms.)
“But George, what if I am wrong? What if I can’t deliver that exact quote?”
Don’t worry about it. All you can do is quote the most likely rate and terms for which the borrower is likely to qualify. You are not issuing a low-ball quote. You are issuing a reasonable, market rate quote.
However, good ethics require that you notify the borrower the moment you learn that you will not be able to deliver the quoted rate.
“Bob, I’m just calling today to let you know that the rate is more likely going to be 5.25% than 4.675%. The reason why is that this area of Chicago isn’t the greatest. Do you still want to continue?”
By this time your borrower will have spent too many hours with you providing documents to start all over. You will rarely lose him
Now I want to be crystal clear that you must not engage in bait-and-switching. No-no-no! If banks in Minnesota are quoting you 5.5% for commercial real estate loans, you must not quote your borrower a 4.625% rate for his Chicago deal. That would be immoral and illegal.
I’m just saying that commercial banks across the country quote very similar programs on commercial real estate loans, so its reasonable – and a good sales practice – to issue very specific commercial loan quotes, even if you do not have a specific bank in mind when you make the quote.
