Commercial Loans and Fun Blog

One of the biggest mistakes commonly made by rookie commercial mortgage brokers is to request far too many loan documents during the first phone call.  Such a mistake is almost guaranteed to kill your commercial loan deal.

These rookie commercial mortgage brokers are no doubt thinking to themselves, “The sooner I gather a complete commercial loan package, the sooner I can submit the deal and get paid.”

The problem with this approach is that most commercial mortgage borrowers are wealthy and busy running their own businesses.  They are not anxious to devote long hours assembling a huge commercial loan package for you when they are not even sure that you will be able to perform.

If you ask for a huge number of loan documents (financial statements, tax returns, leases, LLC operating agreements, etc.), the borrower is likely to think to himself, “Gee, that’s an awful lot of work.  I wonder if someone else out there has an easier process.  I think I’ll make a couple of more calls.”

Therefore it has been my observation that –

The commercial mortgage broker who asks for the least number of loan documents usually gets the deal.

There are other dangers to asking for a complete loan package.  Invariably your commercial loan borrower will not be able to gather every document immediately.  Maybe he’s waiting for a lease extension to be signed.  Maybe he’s waiting for his accountant to complete the latest financial statements on his company.

Since your borrower will not be able to send in a complete loan package, he might not send in anything at all.  He’s thinking to himself, “I’ll just hold off sending in the package until I have everything.”

In the meantime, stuff happens.  A nearby banker might stop by your borrower’s office for his annual business development (schmoozing) session, at which time the banker steals your commercial deal.  Alternatively, your commercial mortgage borrower might mention to his real estate broker-buddy that he’s looking for a commercial loan.  Soon the lead will be rushed to a competing commercial mortgage company, and they could steal your deal.  Given time, there is a very high chance (80%+) that you will lose your commercial loan applicant.

The wise commercial mortgage broker will therefore do everything he can to encourage his borrower to send in some sort of initial package right away.   The package does not have to be complete.  It is just critical that you not allow any delay.

And whatever you do, never-ever-EVER send your borrower a complete list of the documentation that he will eventually be asked to provide.  No-no-no!  Such a description of a complete package is so intimidating and discouraging that it is 100% guaranteed to send your borrower running towards the hills.

In fact, in my 33 years in the commercial mortgage business –

I have lost every single commercial loan app where I sent the borrower a list of the items required in a complete package. 

One hundred percent.  A perfect score.  Because I’m stupid, I tried it over 1,000 times.  Out of those 1,000+ times, I received exactly zero loan packages.

Don’t even do it over the phone.  If you find yourself giving your commercial mortgage borrower over the phone a complete list of the documents that you will eventually need, you have just killed your deal.  Bang!  You just shot a bullet into your deal’s head.  You just stuck an ice pick through its eye.  You just dropped a house on your deal.  Your commercial mortgage deal – as the munchkin’s coroner sang in the Wizard of Oz – is really most sincerely dead.

So never-ever send or verbally give your borrower a complete list of the loan documents that you will eventually need.  The list is way too long and scary.

So how do we request loan documents?  We’ll cover that in an upcoming lesson.

Queue the music theme to the James Bond movie series.  The silhouette of James Bond is now walking across the screen.  Folks, I want you to become the new “Doctor No” of commercial real estate finance.  (The original Doctor No was killed off in the second James Bond movie.)  I want you to learn how to say no.

There is a common theme to my commercial mortgage finance training.  As a commercial mortgage broker, you simply must learn to say, “No,” to those goofy commercial loan requests that will waste your time but will never close. 

Rather than taking a one-in-ten-thousand chance on a goofy commercial loan application, you need to preserve every available working minute and devote it to marketing for do-able commercial loans.

The following words drive me absolutely bonkers:  “Well, I didn’t have any other commercial loan packages going, so I thought I might try to place this (goofy) one.”  Arghhh!  No-no-no!

You could have been using that same time to add new referral sources to your mailing list and to your email list.  You could have been calling on bankers.  You could have been making a few calls to your local realty agent buddies.  You could have been writing up your latest fun newsletter.

How many wealthy income property investors did you add to your newsletter list this week?  You didn’t have time?  Hmmmmm.

So let’s practice this today together:

“Hey, George, do you know anyone who would finance a golf course in Mexico?”

Sorry, Steve, but the answer is no.  If an American bank were to make a loan in Mexico, the Mexican government would slap a 30% withholding tax on its interest income.  If the nearby Mexican banks won’t do the deal, it will never get done.

“Hey, George, I have a client who needs a $10 million loan to buy a commercial building.  Do you know someone who could finance this deal?”

What’s his net worth, Bob?  Just $1.2 million, huh?  How much is he putting down?  He’s trying to get away with just 7% down?  I’m sorry, Bob, but the answer is no.  Your buyer isn’t strong enough to qualify for a $10 million loan.  He would need a net worth of pretty close to $10 million to qualify for a $10 million loan.

“Hey, George, do you have any construction lenders who would finance the construction of a new $7 million spec office building?”

Gee, Ralph, very few banks will finance new commercial construction, unless the builder is prepared to cover at least 35% of the total project cost.  Does your builder have at least $2.45 million (35% of a total project cost of $7 million) to contribute to the project?  No?  Then I’m sorry but my answer is no.

“Hey, George, do you know anyone who will finance a gold mine?  Our expert says there is $100 trillion in gold reserves in this mine.”

No.  I have never known anyone to close a mine deal in my 33 years in this business.

“Hey, George, do you know anyone who will make a $4 million acquisition and development loan on a residential subdivision in the Central Valley of California (the worst housing market in the country)?”

If you were asking for San Antonio, Texas; Austin, Texas; or Washington, DC, the answer would have been maybe.  But John, unless you’re talking about the absolute hottest housing markets in the country, no one is making subdivision A&D loans right now.   There are enough finished but unsold residential lots in America to last for another twelve years.

“Hey, George, I know a guy who knows a guy who needs a …”

Sorry, Jack, but the answer is already no.  Daisy chains don’t close.

“Gee, George, what kind of commercial loan are you looking for?”

I’m looking for permanent loans on standing commercial properties only.  A standing commercial property is one that is already built.  These are the only type of commercial real estate loans that are actually closing today.

And the smaller the loan, the greater the chance that the loan will actually close.  I’ll take one loan of $600,000 over ten loans of $6 million any day.  Unlike a lot of newbie commercial mortgage brokers, I actually want to close deals and get fed.

Success in the commercial mortgage brokerage business does not usually happen overnight.  It could be seven to eight months before you finally start to hit your stride.  Here’s why:

1. Commercial banks are the lenders closing most of the new commercial real estate loans today, and the average bank takes four months to close a commercial loan.  Yeah, yeah … the bank loan officer will tell you that the process only takes about 60 days … but he’s flat-out lying to you.  A narrative income-property appraisal alone takes about 60 days, and most commercial lenders don’t even order the appraisal until 30 to 45 days into the process.
   
   
2. Traditional advertising – like direct mail, magazine advertising, radio advertising, and TV advertising – simply does not work in the commercial mortgage business.  You are therefore going to have to build yourself a network of 1,000+ referral sources.  These referral sources won’t start producing a lot of leads for you for at least six weeks, assuming you hit them with a newsletter every ten days for six weeks.  You’ll surely build a relationship with these contacts, but these relationships take a little time.
   
   
3. Therefore, even if you hit the ground running, it’s likely to take at least six weeks plus another four months before the first of your commercial loans start to close.

The wise newbie will therefore keep his day job as he starts to build his mailing list and email list of referral sources.  If you are teaching school or driving a cab, keep at it until your pipeline finally starts to deliver.  If you are currently working as a residential mortgage broker, keep at it!   With interest rates so low, this is a good time to be refinancing homes.

Since it takes so long to close your very first commercial loan, why should you even bother to learn commercial real estate finance?  There is a superb reason, and I want you to read this answer at least three times:

Wealthy investors own the big commercial buildings you see around town, and there is no better way to meet those wealthy investors than to be a commercial mortgage broker.

Please re-read the above paragraph two more times and permanently engrain this concept into your head.

Once you have met and worked hard for a wealthy investor – you don’t even have to close a loan for him – you can make all kinds of money from this relationship.

You can sell this wealthy investor rental homes or commercial REO’s (properties foreclosed upon by a bank).  You can manage a few properties for him.  You can convince him to buy hard money mortgages from you.  You can convince him to invest in a private money mortgage fund that you run.  You can syndicate your wealthy investors to buy huge commercial properties.   You can even partner with these wealthy investors if they have a great idea of their own.

So why do you want to become a commercial mortgage broker?  Answer:  Because there is no easier way to meet wealthy investors than to become a commercial mortgage broker.

In the mortgage business, a wholesaler is lender or broker that accepts deals almost exclusively from mortgage brokers.  In contrast, a retailer is a lender or broker that only accepts loan applications directly from the borrower or real estate agents.

Never try to be a commercial mortgage wholesaler.  It simply doesn’t work.

The concept sounds like it should work.  A mortgage broker becomes an expert at placing commercial mortgage loans.  He sets up a network of 500 residential mortgage brokers to bird-dog for him.  The residential mortgage brokers bring him all of their commercial loans, and then the commercial mortgage expert uses his expertise to place these commercial loans.  The residential mortgage broker adds a point to the deal, and the commercial mortgage expert adds a point for himself. 

This should work, right?  Unfortunately it doesn’t.  But why?

1. Even rookie mortgage brokers quickly learn that daisy chains don’t close.
   
   
2. Therefore your residential bird-dogs will take their easy and do-able commercial loans directly to some bank.
   
   
3. Your residential bird-dogs will only bring you their commercial mortgage deals that have been turned down by every direct commercial lender that they know.  In other words, if you try to work as a commercial mortgage wholesaler, the only commercial loan applications that you’ll ever receive will be the dregs – deals that have already been turned down by a half-dozen commercial lenders.
   
   
4. Worse yet, your residential bird-dogs won’t tell you that the deal has already been turned down by six other lenders.  They won’t tell you that the deal has a toxic contamination problem, a vacancy problem, a structural engineering problem, or a crumby-trashy-druggie neighborhood problem.  They won’t tell you because they’re hoping that your lender won’t find out.  In the process, you’ll spend countless hours working on dozens of commercial loans that never had a chance in Hades of ever closing.
   
   
5. Working as a commercial mortgage wholesaler also guarantees that every deal you work on will have a daisy chain problem – lousy communication, bald-faced lies by the intervening brokers, and excessive loan fees (packing).  Packed deals almost never close.

So be smart.  Never try to work as a commercial mortgage wholesaler.

Now this does NOT mean that you should never work with other mortgage brokers.  Residential mortgage brokers often make great bird-dogs.

However, you must ONLY work with residential mortgage brokers on a name-and-number referral basis.

Their job is to call you up or email you the name and number of a potential commercial mortgage borrower in exchange for a 10% or 20% referral fee.  They must not try to work as your loan agent or as a commercial mortgage broker 

If your residential bird-dog starts trying to play commercial mortgage broker, you have to cut him off.   Really?

Yes!  The reason why is because he will never again bring you an easy, do-able commercial loan again, like the purchase of a small apartment building or the refinance of a ballooning loan on a standing commercial property.  He’s already taken those loans to his own stable of banks.

Instead, your ambitious bird-dog will only bring you the deals that he cannot place himself - like a goofy $15 million land development deal, a loan on a gold mine, or some pipe-dream commercial construction loan to some undercapitalized developer with poor credit.  You have to cut him off.

So don’t forget – never try to be a commercial mortgage wholesaler.  You will waste countess hours pouring over crumby, hard-to-understand loan packages, and you will never close a single loan.

Not long ago one of our loan officers had a little $400,000 apartment loan that was far too clean to go hard money.  It needed to be placed with a bank.  Alert-alert – this is the perfect size and type of commercial deal to actually close and make a commission!

We entered the deal into C-Loans.com, but none of our C-Loans lenders wanted to do the deal.  It was too small and in a rural area.

We next went to Yahoo Maps, plotted the property on a map, and then asked for nearby banks.  Unfortunately none of the local banks wanted to do the deal.

Now what?

You can easily find banks of the perfect size that are located close to the subject property by going to the FDIC’s website.

1. Go to http://www.fdic.gov
   
   
2. In the middle of the FDIC’s home page, left-justified, you will see a blue and gray banner that reads, Quick Search | Top Search | About FDIC.
   
   
3. Click on the middle link, “Top Search”.
   
   
4. Click on the link in the second column, “Bank Find”.
   
   
5. About two-thirds of the way down the page, on the right, click on the button that reads, “More Search Options”.
   
   
6. Fill in the “County” and “State” where the property is located.
   
   
7. At the bottom of the search criteria, click “Find”.
   
   
8. You will find potential banks listed in asset size order, the largest banks being listed first.  Choose a bank of the appropriate size.  Remember, banks are uncomfortable making commercial loans that are more 2.5% of their Total Assets (25% of their legal lending limit).
   
   
9. If you cannot find the perfect bank in that county, expand your search to nearby counties.

This is wonderful tool you can use to find banks willing to fund your commercial loan.

Here is a simple but important rule:  Big banks like to make big commercial loans.  Small banks like to make small commercial loans.  The wise commercial mortgage borrower or broker will therefore match the size of his commercial loan request to the size of the bank to which he submits his loan.

The reason has to do with legal lending limits.  National banks cannot lend more than around 10% of their capital and reserves to a single borrower.  Therefore, if your small, local bank has just $20 million in capital, it cannot lend more than $2 million to a single commercial mortgage borrower.

In real life, banks rarely make commercial loans larger than about 25% of their legal lending limit.  In practice, therefore, this small, local bank will probably seldom make a commercial real estate loan much larger than $500,000 (25% of $2 million).

At the opposite end of the spectrum, Wells Fargo Bank, the fourth largest bank in America, loves to make $20 million commercial loans.  Instead of making 40 commercial loans of $500,000; they only have to make one commercial loan of $20 million.  It’s a lot less work and far more profitable.

So what’s a big bank?  What’s a small bank?  A small bank arguably is any bank with less than $1 billion in assets.

What are a bank’s assets anyway?  Bank assets consist mainly of outstanding loans.  Deposits are liabilities because they eventually have to be given back to the depositors.

A large bank is any bank with more than $20 billion in assets.  There are about 50 banks in America with more than $20 billion in assets.

Do you know what is worse than not having a single commercial loan in process?  Having a pipeline containing any of the following commercial loan applications:

1. International loans
   
   
2. Enormous loans
   
   
3. Land loans and land development loans
   
   
4. Construction loans on residential subdivisions or residential condominiums.
   
   
5. Commercial construction loans to weak and/or poor-credit developers
   
   
6. Loans on any kinds of mines (gold, silver, copper, etc.)
   
   
7. Joint ventures
   
   
8. Loans involving certificates of deposits being deposited into the lending bank
   
   
9. Credit-enhanced bonds
   
   
10. Daisy chains involving even one other mortgage broker

Each of the above types of commercial loan applications is a complete waste of time.  You could have a pipeline full of 1,000 such commercial loans, and you will not close a single loan - not one!

A lot of newbie commercial mortgage brokers say goofy stuff like,  “Well, I have nothing else to work on, so I might as well work on this international loan or this speculative residential construction loan or this enormous loan or this gold mine loan or this daisy chain deal.”

No-no-no!  That is soooo stupid.  Do not waste even one precious minute on any of the above loans.  All such loans will do is to waste your time, your gas, your postage, and your phone minutes.  You will never feed your family working on any of the above loans.

The only real asset you own is your time.  If you don’t have a single decent commercial loan going, use your precious time to build your email list of referral sources.  Drop in on some local bankers ask for their turndowns.  Write up a quick email newsletter and blast it out to your referral contacts.

Just don’t waste your precious time trying to place a pipedream deal like the ones above.

Commercial lenders greatly prefer to make their commercial real estate loans in their own backyard.  They know the neighborhoods – which ones are safe, which ones are affluent, and which ones are dangerous.

Another advantage to making commercial real estate loans close to your office is that the lender knows his local markets – which sub-markets are overbuilt and which sub-markets are starving for commercial space.  For example, maybe a large state university keeps the nearby commercial vacancy rate below 3%.

In the event of a foreclosure, it is also much easier for a commercial lender to handle the renovation, the leasing, and the property management if the commercial property is located close to the commercial lender’s office.

It is MUCH easier to sell a commercial lender on a funding a commercial loan if the property is located close to his office.

But how do you find commercial lenders located close to the commercial property that you are trying to finance?  It’s easy if you use Yahoo Maps.

1. Go to http://www.maps.yahoo.com
2. Type in the address of the commercial property that you are trying to finance.  This will bring up a map of the area immediately surrounding your property.
   
   
3. In the “Find a Business” field, type in the word, “bank”.
   
   
4. Little orange icons, representing the location of nearby banks, will appear on your map.  If you hover your cursor over one of the icons, the address and phone number of the bank will appear.
   
   
5. Simply call the bank, ask for a commercial real estate loan officer, and then run the deal by him.
   
   
6. If none of the nearby banks wants to finance the deal, simply expand your map outwards to see even more banks located slightly further away, until you finally find a home for your deal.

At this point, you have gotten the commercial mortgage deal in the door, collected most of the loan package, prepared by a short PDF on the commercial loan, and now you need to find a commercial lender for your deal.

There are a number of different ways to find commercial lenders for your commercial loan; but by far the easiest and most efficient way is to use C-Loans.com.  C-Loans.com is a commercial mortgage portal.  The user enters his commercial loan into the system just once.  It’s merely a matter of filling out a mini-app that takes about four minutes to complete.

The mini-app will ask questions, like the amount of the loan, the type of the loan (permanent loan, construction loan, bridge loan, etc.), the type of property (multifamily, motel, office, etc.), and the county and state where the property is located.

When your application is complete, you press a button and ask for commercial lenders.  C-Loans.com will then search its databank of 750 participating commercial lenders and screen out all of the unsuitable lenders.  A commercial lender may be unsuitable because the loan amount is too small, the lender doesn’t like self-storage projects, or the property is located too far away from the nearest office of the lender.

C-Loans will then produce for you a Suggested Lender List consisting of 30 or so suitable commercial lenders.  You can submit your commercial loan to six lenders at a time, simply by inserting a check mark next to the name of the lender.  If all six commercial lenders turn you down, you simply come back and choose six more commercial lenders, until your find a home for your commercial loan.

And best of all, C-Loans.com is free.

Does it work?  C-Loans.com has closed more than 1,000 different commercial loans totaling over $1 billion.

A daisy chain is when one commercial loan broker takes a commercial loan to another commercial loan broker, who then tries to take that commercial loan to a lender.

Daisy chains don’t close!

There are a number of reasons why daisy chains don’t close:

1. The loan fees quickly get excessive.  The first broker tries to charge a point.  Then the second broker adds two more points.  (Often a third broker tries to add another point or two.)  The lender charges three points.  Pretty soon you’re trying to sell the borrower on paying six to seven points for a three to four point loan.  Folks, in real life, borrowers never sit still for packing (a loan that gets packed with excessive loan fees).  And if a borrower will sit still for packing, his loan is so bad that he is desperate.  Loans for financially desperate borrowers almost never close.
   
   
2. Communication gets garbled.  Do you remember that game in we used to play in the first grade?  Seven people stand in a line.  The first guy whispers a phrase into the ear of the second guy, “Billy Batson has a crush on Lizzy Larson.”  The second guy whispers the message into the ear of the third person … and so on.  By the time the message reaches the seventh person in line, the message has been grossly distorted, “Billy brained Lizzy with a bat, and now she’s in Larson Hospital.”  Lenders can tell when a deal is involved in a daisy chain.  They quickly get irritated and turn the deal down.
   
   
3. Most daisy chains involve the blind leading the blind.  One of the first lessons that everyone learns in the commercial mortgage brokerage business is that daisy chains don’t close.  This means that if another commercial mortgage broker is willing to let you stay in the loop and add a point or two to the deal, then that second commercial mortgage broker is obviously a complete rookie too!  (In other words, this so-called placement expert upon whom you're relying is a rookie himself and an idiot.)   Rookies don’t have special, four-year relationships with some bank loan officer, the type of relationship it often takes to actually close commercial loans.  If you're involved in a daisy chain right now, you may still be in denial.  Don’t worry about it.  You’ll eventually discover for yourself that daisy chains don’t close.  We all learn that lesson.
   
   
4. How it should work.  Suppose an experienced commercial mortgage broker uses rookies as his bird dogs to bring him commercial loan applicants.  He would pay his bird dogs 10% to 20% of whatever loan fee he managed to earn (rather than allowing them to pack on points), and he would insist on speaking directly to the borrower.  He would not allow anyone to stay between him and the borrower.  Then the experienced broker would take the deal directly to a bank, with no one else in between.   Such a working relationship is far-far different from the silly, hopeless daisy chains that we regularly see here at Blackburne & Sons.

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