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HUD raises fines for lenders who fail to assist troubled borrowers

Sep 28, 2005

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].
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