Small commercial lending success tips Art "Ski" Swiatkowskicommercial market, lender specifications, residential differences
As manager of the business development department for a company
that specializes in small commercial and income property lending, I
have the pleasant task of interacting with mortgage brokers and
originators from all across the country. Since the majority of the
brokers I meet come from a residential background with little or no
experience in commercial lending, the conversation invariably rolls
around to, "What do I need to do to be successful in small
commercial lending?"
While I believe that the underlying principles for success in
this area are similar to those in the residential mortgage market,
here is some good advice that will address the subtleties and
ensure your success.
Learn the differences between residential and commercial
transactions
This is critical to residential brokers trying to make their way in
commercial lending. Without understanding the differences, working
in the commercial side of the business can be like trying to jam a
round peg into a square hole--frustrating and fruitless for you,
your client and your lender.
Concepts like prepayment penalty, lockout and environmental
studies need to be understood and communicated to your clients.
Another major difference is the appraisal. Unlike the residential
world where the borrower is the number one element in the deal,
commercial deals have their primary focus on the appraisal. Since
all commercial lenders make it the key element of the deal, a
tremendous amount of research and work goes into developing an
accurate value for the subject property.
It is also particularly important for you to prepare your client
for the big difference in cost between a residential and commercial
appraisal. Instead of the $300 or $350 fee charged for a
residential appraisal, your client will typically be looking at
between $1,000 and several thousand dollars for a commercial
appraisal.
Learn your lenders' programs
The "round peg, square hole" scenario applies here as well. Unlike
the residential world where Fannie Mae and the Freddie Mac have
helped create rather homogeneous loan products, most commercial
program parameters differ from lender to lender. Maximum/minimum
loan amounts vary. Acceptable property types differ with each
lender. Lenders set up geographic limitations and use non-standard
underwriting. All this contributes to the fragmentation of the
small commercial market and confusion for the novice. For this
reason, it is important to get to know a lender's guidelines before
sending a deal to them. Failure to do so could easily result in
wasted time and effort for everyone involved.
Target your marketing to surface prospects that match
your lenders' programs
Most brokers who are new to commercial lending use a shotgun
approach to marketing for commercial deals. They attempt to find
any commercial prospect. Some merely wait for whatever lands on
their desk. The problem with these approaches is that they can end
up wasting time and energy on deals that cannot be funded by their
current lending sources.
Matching your marketing effort to your lenders' program
parameters means that you will be working with prospects and
properties that can be funded. It gives you a very efficient,
cost-effective way to go after the small commercial market. Its
just smart marketing. So, until you have a stable of lenders whose
guidelines you are thoroughly comfortable with, keep your marketing
focused.
Discover your prospects' needs/problems
As the prospects begin to appear on your radar screen, it will be
important to ask questions to ensure that they do fit one of your
lenders' programs. But it will be equally important to discover why
the prospect needs the financing. I don't just mean to "refinance
his supermarket" or "purchase a location for her dress shop." I'm
talking about finding their motives, their objectives. Perhaps
acquiring a location for their business is a step in their plan for
financial independence. Maybe the refinance will enable them to
hire a manager so they can spend more time with their family. This
becomes extremely valuable information when you are selling your
solution to the prospect.
These prospects are business people, investors and entrepreneurs
who are attempting to make a good business decision. They have a
strong emotional attachment to their business and they want it to
succeed. Your job is to ask good questions that get them to reveal
how they will ultimately benefit from the financing they are
requesting.
Unfortunately, many neophyte brokers fail to uncover these
underlying needs/problems, thereby leaving the prospect in a
rate-shopping mode.
Sell your solution to their needs/problems
After you have established their needs/problems and you know that
you have a lender that can meet the loan requirements, you are
ready to close for the application. It is very important to keep
them focused on their needs/problems. Let them know that you have a
program that provides a solution. You are a problem solver. That is
the value that you bring to the transaction. Failure to do so could
mean that they will attempt to make a decision while focused on the
rate, points or other aspects that they might see as negative. By
focusing on the needs/problems and your solution, you increase the
likelihood that you will get the application.
Be sure to give full disclosure to your
client
Once the prospect agrees to proceed with the application, you must
be sure to convey all of the pertinent information regarding the
loan, such as the type of mortgage program, the rate, term, lock
out and prepayment, environmental requirements and cost of the
appraisal. Remember, you are providing a solution. Their lack of
knowledge and misconceptions can get in the way of seeing your
offering as the solution.
By explaining these items up front, you are able to address the
client's lack of knowledge about the commercial lending process and
keep them focused on your solution.
Small commercial lending is the best place to start for the
residential broker looking to branch out into new territory,
explore ways to create an additional income stream and ultimately
improve their bottom line. It is my observation that the broker who
has the discipline and drive to make the paradigm shift from the
residential mindset to the commercial approach of selling the deal
has proven to be the most successful.
Art "Ski" Swiatkowski is vice president of business
development for InterBay Funding LLC, a national wholesaler of
small commercial and income-producing properties. He may be reached
at (215) 283-4520 or e-mail at
[email protected].
