Back in August of 2012, I wrote my most important blog article ever of the subject of commercial loans and commercial loan brokerage. If you read only one commercial real estate finance training article in your lifetime, make sure you read my 2012 blog article entitled, The Most Important Lesson in All of Commercial Real Estate Finance. This lesson is an advanced version of that article.
In real life, the typical commercial real estate loan officer working for a bank, a conduit, or a life company closes 80% of his commercial loans for just 5 or 6 mortgage brokers. I am going to call these five or six mortgage bankers and mortgage brokers the loan officer's "best brokers".
By the way, do you know the difference between a mortgage banker and a mortgage broker? A mortgage banker retains the loan servicing rights and typically earns between 8 and 32 basis points per year for collecting the loan payments on behalf of the lender.
I know that 10 basis points doesn't sound like much, but 10 basis points on a $20 million loan is $20,000 per year, just for collecting 12 payments and forwarding them on to the investor. Remember this: The real money is commercial real estate finance is in the loan servicing rights.
"Yeah, George, but servicing loans is hard."
Naw. My beautiful bride serviced our first 30 commercial real estate loans out of a bedroom in our home, when George IV and Tommy were still both in diapers. She did it with no loan servicing software, just using some payment books given to us by the title company. The borrower would send in his payment book, along with his monthly check. She would write in the payment book the total amount of his payment, the amount that went to interest, the amount that went to interest, and his remaining principal balance. Then she would mail the payment book back to the borrower. Voila!
Today, my hard money commercial mortgage company, Blackburne & Sons, services about 180 private money commercial loans, totaling around $40 million, for an average annual loan servicing fee of 200 basis points (2.0%). You really-really owe it to yourself to do the math. What is 2% of $40 million? Now you can see why I say the real money in commercial real estate finance is in loan servicing fees.
Okay, now back to how most commercial loan officers close 80% of their loans for just 5 or 6 "best brokers". The 2,000 other brokers who bring this loan officer deals account for a mere 20% of his total production. And folks, this reality is probably true for almost every commercial real estate loan officer in the country.
So why do commercial loan officers close most of their deals with just a half-dozen of their "best brokers"? Expediency. A commercial loan officer cannot possibly train every mortgage broker who calls him in what exactly to look for in a deal. There is simply not enough time in the day.
So most commercial loan officers end up training a mere half-dozen brokers in the finer details of his bank's particular commercial loan appetite. As a result, since the lender has carefully trained these 5 to 6 brokers, he knows that if one of his best brokers does call that this best broker probably has a carefully-screened and do-able deal for him. The lender takes his call. For every other broker who calls, the commercial loan officer's staff often just takes a message. Maybe the non-preferred mortgage broker get a call-back later, but often he doesn't. Best brokers get priority.
There is a huge advantage to being a banker's best broker. If a commercial lender likes you and/or considers you one of his best brokers, he will often overlook a black hair. A black hair is a flaw in the deal.
Underwriting commercial real estate loans is not about finding a black hair in a deal and then turning it down. The truth is that every commercial real estate loan ever made has had at least one or two black hairs. The secret to underwriting commercial loans is to know how to properly weigh the strengths of the deal against the weaknesses. If you are a banker's best broker (one of six or so), he won't get fixated on just one or two black hairs.
Okay, so obviously we all want to be some banker's best broker. So how do you become a best broker?
A lot of it is luck. If you happen to stumble upon a commercial loan that is perfect for some new lender, and he happens to close it for you, you both leave the relationship with a good feeling about each other. The next time you call this lender, with one closing together already under your belt, he will be much more inclined to look favorably on your deal.
The lesson to be learned here is this: Suppose you close a nice apartment deal with Bill Smith at Union Bank. Suddenly, another sweet apartment deal falls in your lap. Do you take the loan to Bill Smith again at Union Bank, or do you take it to Todd Stranger at JP Morgan Chase? Maybe, under this fact pattern, you should take the deal back to Bill Smith and really cement that budding best broker relationship.
So how else can you become the best broker of a number of commercial loan officers? Here are some thoughts: (1) Deliver your commercial loan packages in person and schmooze the loan officer. (2) Charm the receptionist or loan department secretary, so she will mention your name positively around the office. Flowers. Candies. Compliments. (3) Take your loan officer to lunch. (4) Play golf with your banker. (5) Invite him to your home to watch football or to BBQ. (6) Perform a kindness or favor, like visiting him in the hospital or finding him a new book by his favorite author. My darling wife taught me this. If you want friends, be a friend.
This brings me to my last point. I once shared that even though there are 750 different commercial lenders on C-Loans, fully 40% of our online loans are closed by the 30 or so "Proven Brokers" listed on C-Loans. Why? Because these Proven Brokers are the best brokers for three, four, or five different banks. As a result, when they submit a loan to one of their banks, with whom they have a special relationship, the banker properly weighs the pro's and the con's of the deal, and the black hairs are often overlooked.
I know you guys prefer to deal directly with the bank, but there is a time to leverage the special relationship our Proven Brokers have with their banks. Commercial loan brokerage is not so much about what you know, but rather with whom do you have a best broker relationship?
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I once paid a $21,250 referral fee to a guy who merely put a Commercial Loans link on his real estate website. How would you like to get that phone call?
I like residual income - money that comes in every month whether I close any new loans or not. Residual income, like loan servicing income, allows me to sleep at night. A huge network of referring sources is not technically a form of residual income, but enjoying a steady flow of incoming leads every month sure chases away my mental storm clouds.
We have added my seven-hour audio course, Intermediate Commercial Mortgage Finance, to our famous (2,000+ graduates?) 9-hour basic training course, How to Broker Commercial Loans, all for just $549.
You can add my four-hour video course, How To Find Your Own Private Mortgage Investors, to the above training collection, and get all three training courses for just $849. The real money in commercial real estate finance is in loan servicing fees. The easiest way to get loan servicing rights is to become a hard money lender. Its never been easier to raise money from private investors. The banks are paying less than 0.50%.
My hard money commercial mortgage company is approving commercial loans like crazy these days. Yield-desperate private investors are beating down our doors. We need commercial loans! And we issue Loan Approval Letters for no charge. You can show our LAL to your banker and say, "A private money lender has already approved this loan. You can beat these rates, right?" It's a lot easier to meet lovely ladies when you already have a pretty girl on your arm. And if the bank leaves you standing at the altar looking stupid, your borrower can always fall back on our loan.
C-Loans now arranges business loans NOT secured by real estate, like unsecured loans, equipment loans, inventory loans, accounts receivable loans, factoring, leasing, and asset-backed lines of credit.
Great commercial lenders are flocking to C-Loans again. We recently signed up, in addition to a dozen other lenders, one of the largest investment banks in th world.
Sooner or later I am going to come to my senses and take this offer away. "George, you stupid-stupid man, why are you giving away a list of 2,000 commercial real estate lenders - a list that cost you at least $10,000 to build - all for the contents of one lousy business card?"
Been cheated out of a $10,000 commercial loan fee yet? If not, your impalement is coming. It happens to all of us. It happened to me so many times that I went to law school at night, graduated with honors, passed the Bar on my first attempt, and then never accepted a single law client, outside of my own company. I would fall off my chair in shock if any other company had completed and won more loan fee collection suits than my own. And no, I will NOT represent you. But I will teach you my secrets. Armed with these secrets, you won't need me.