Commercial Loans and Fun Blog

How to Fix Your Commercial Loan Business If You're Not Making Money

Posted by George Blackburne on Fri, Oct 12, 2012

If you’re not making any money as a commercial mortgage broker, this lesson should tell you what you’re doing wrong.

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First of all, you are probably working on goofy loans.  By “goofy loans” I mean international loans, loans larger than $10 million, land loans and land development loans, residential subdivision construction loans, commercial construction loans without an SBA takeout, loans on mines, joint ventures, loans involving certificates of deposit, credit-enhanced loans, and loans involved in a daisy chain.  Folks, you could have a pipeline of 10,000 such loans and never close a single one.

I urge you to take a look at your current pipeline of deals and mentally kick out any of the above types of loans.  The few (if any) remaining loans are your only commercial loans that have a snowball’s chance of closing.

In fact, each of the above loans is worse than having no commercial loans at all in your pipeline.  All they will do is waste time that should be spent finding permanent loans on standing commercial properties.

The most valuable asset you own as a commercial mortgage broker is your time.  You must learn how to say “no” twenty times per day.

What kinds of commercial loans should you be working on?  Small loans on standing commercial properties, ideally less than $2 million, multifamily loans, SBA loans, USDA Business and Industry loans, loans to refinance balloon payments, refinances of under-leveraged commercial buildings to cash-needy borrowers, discounted payoff’s (DPO’s), loans to purchase REO’s, and possibly commercial construction loans with an SBA or USDA takeout loan.

If you remember nothing else from this lesson, just remember that small commercial loans close I would rather have just one $600,000 commercial loan than ten commercial loans of over $6 million each.  It has been my experience that large commercial loans only close when you don’t need the commission.  Remember also that the larger the loan, the more bank executives who have to review it before it gets approved.  Any one of them could have a pet peeve.

The bank loan officers who handle the really large commercial loans are very cliquish.  They will usually just kiss off your first half-dozen deals because they want you to go away.   You’re not one of the good ‘ole boys.  Sometimes it feels like a new broker has to sacrifice five good loans on the altar of a new lender before the lender will even start to pay attention to him.

The most important lesson I have ever learned after 32 years in commercial real estate finance is this – commercial lenders close loans for their friends.  You need to become good friends with a bank loan officer before he will close a large commercial loan for you.

Instead of working on goofy loans, you should be spending 60% of your time on marketing for do-able commercial loans.

The way to market for commercial loans is build a huge snail-mail list and email list of wealthy real estate investors and referral sources.  The best referral sources are bankers, commercial real estate brokers, property managers, residential mortgage brokers, other commercial lenders (hard money brokers, credit unions, etc.), attorneys, CPA’s, and insurance agents.

You should focus your marketing on local referral sources, so you get local deals on local properties that you can personally inspect.  It’s easy to pinpoint nearby banks, realtors, property managers and such by plotting your office on Yahoo Maps and then asking the map program to plot the nearest banks, etc.  You should then solicit these same guys using funny and interesting newsletters.

When quoting a commercial real estate loan, be sure to quote a very specific rate and term, even if you don’t know which bank will eventually fund your deal.  Borrowers want to hear specificity.  The good news is that most banks offer similar programs.  If you’re slightly off, simply correct yourself as soon as you discover it.

Try to never bring up the subject of appraisals and toxic reports.  You’ll lose the borrowers to sticker shock.

The wise commercial mortgage broker will personally inspect every property he tries to finance.  If the property is too far away to personally inspect, learn how to use demographic websites and neighborhood crime websites to identify low- income, high-drug-use, and high-crime neighborhoods.

Always include a picture with your commercial loan package.  Much depends on a handsome picture taken on sunny day.  You should also learn how to use Google Earth to take a bird’s eye picture of the neighborhood surrounding your property.

It’s no longer necessary to send loan packages by Fed Ex or snail mail.  Instead, learn how to turn a short Executive Loan Summary into a PDF that you can send by email.

Finding commercial lenders is easy and straight forward using, Yahoo Maps, and the FDIC’s own website.  Just be sure to match the size of your loan to the size of the bank.  And don’t forget about credit unions.  They often have the lowest rates.

After submitting your commercial loan to a banker, be sure to call the banker to “confirm receipt of the loan package.”  The call will serve as a gentle kick in the tush to actually read the package.

When you approach a lender of the phone, the first words out of your mouth should be, “Hey Bill, I’d like to run a commercial loan by you.  Did I catch you at a good time?  If not, I’ll be happy to call back later.”

A lot depends on your loan officer.  Commercial real estate lending is an advocacy process, where your loan officer has to fight for your deal before Loan Committee.  If your loan officer is a wimp, find a different one.

How do you spot a hot commercial loan officer?  Often the receptionist or the loan department secretary will share with you the name of their hottest commercial loan officer.  Look for younger males on commission or at least one on a salary-plus-bonus compensation plan.  The older guys on straight commission often couldn’t give a flip.  If one commercial loan officer blows you off, try another one at the same bank the following day.

Be careful of advance fee scammers posing as commercial lenders.  Distrust immediately any “lender” who claims he makes international loans, that he represents hedge funds, or is a merchant banker.  I promise you that they are either rookies or frauds.

Learn to spot hot commercial loan leads – properties with balloon payments coming due, deals where the lender has offered a discounted pay off, low LTV deals to companies that are losing money and need to pull dough out of their properties, free-and-clear commercial properties that have just been inherited by the heirs, or purchase-money deals where the buyer is doing an exchange.

Never talk about a debt service coverage ratio with a lender without sharing what loan constant you used to compute the ratio.

Always get a signed fee agreement with your borrower, but don’t ask for it too soon.  Work him nearly to death fetching you documents first so that he has a stake in the process.

When requesting the documents for your loan package, never ask for a complete package.  No-no-no!  The magnitude of the work in front of him will send him running for the hills.  Instead, bleed the documents out of him slowly, giving him lots of positive encouragement after receiving each batch.

The wise commercial mortgage broker will work out of his house.  Your borrowers won’t mind.  And fire all of your staff.  You don’t need them.  Keep your day job as you build up your pipeline – be it originating home loans or driving cab.  This business takes a while to build.

Whatever you do, never try to be a commercial mortgage wholesaler.  Your brokers will only bring you their crumby deals that they couldn’t place elsewhere.  You’ll waste countless hours and never close a deal.

There are lots of ways to close commercial loans.  The seller could carry back a second mortgage on another property owned by your buyer.  Perhaps the holder of a ballooning loan could subordinate part of his loan for a partial pay-down.  Your lender could blanket other collateral.  You could bring in a strong personal guarantor.  Your borrower could sell off assets and bring cash to the closing.  You can also very often convince a bank to take a discounted pay-off.

Why even bother becoming a commercial mortgage broker?  Because commercial properties are owned by rich folks!  There is no better way to meet high-net-worth investors than to be a commercial mortgage broker.

Once you meet these rich folks, you can finance their other properties, sell them other properties, syndicate them into groups to buy larger properties, or even someday sell them first trust deeds.  For example, I own a $50 million hard money shop, and almost every one of my early investors was a former borrower.

Be smart.  Read this summary over and over again until these lessons truly sink in.  Good luck.  I hope this helps.

George Blackburne III
Plymouth, Indiana
October 12, 2012

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Topics: summary