The commercial corner: The lowest rate is often not the best valueMike Boggianocommercial market, interest rate, leads
The Mortgage Press is pleased to present "The Commercial
Corner," a monthly column by Mike Boggiano of Silver Hill Financial
LLC dedicated to answering your questions about the commercial
mortgage marketplace. If you have a question that you would like
answered in a future installment of "The Commercial Corner," e-mail
[email protected].
Q: In my residential business, all of the rates
available to my borrowers are very similar. However, when I looked
into a commercial lead, the rates I encountered varied
dramatically. Why is that?
A: In the residential world, lenders underwrite borrowers
by looking at their debt-to-income ratios and can lend at a high
loan-to-value, often above 90 percent. The residential market is
efficient and transparent, in that all of the players know what
others offer. Exit strategies are dominated by agencies, and risk
is well understood across borrower types. The commercial market, on
the other hand, is very different. This market is fragmented,
inefficient and has many types of lenders with varied exit
strategies, costs and risk tolerance.
Q: Whenever I have received a commercial lead, I have
gone to my local bank to see if they were interested in originating
a loan. Usually they were not interested, but if they were, the
borrowers eventually balked at what was offered even though the
rate seemed low. What could I have done to close these loans?
A: Any good borrower can approach their local bank and, if
the property type fits the banks parameters, get a better rate than
what is offered by lenders. However, as a broker who relies on
relationships for business, it is important for you to understand
the implications of a commercial bank loan for your borrower. Many
lenders have a matrix-driven process that allows loans to be
underwritten based on certain criteria, such as credit score,
property type and loan-to-value. Banks, however, have subjective
loan committees, often charge lender points and legal fees, and
usually require yearly audited financial statements from the
borrower. The low rate offered by a bank may also involve a balloon
or interest-only payment. So, banks do offer low rates, but there
are other transaction costs that must be considered.
Lenders offer a variety of programs, a few of which function
more like a residential mortgage than a commercial loan issued by a
bank. These types of programs could be considered when offering
financing to your clients, as some borrowers are not shopping for
the lowest rate but the easiest transaction to close. Thus, while
banks often provide an inexpensive financing option, the
differences between banks and lenders should be considered every
time you determine how to proceed with a transaction. Such an
analysis will often lead you to the conclusion that it is important
to consider the entire program offered by the various lenders you
consider, and not just their rates. Shop for value, not the lowest
rate, and your borrowers will not be disappointed.
Q: I enjoy providing excellent service to my borrowers,
often by finding them the lowest rate available. Now I am
considering branching out into the commercial market. Where can I
start looking for the best rates?
A: It is exciting to hear of your plans to offer
commercial brokering to your clients. By expanding to commercial
lines, you will likely find yourself becoming even more of a
resource to your clients; this will lead to more business and
resulting referrals. However, be cautious when choosing the loan
program for your borrower. Rate is only part of the equation, and
you wouldnt want to damage a strong relationship by placing a
client with a lender that may not be able to meet all of their
needs. For example, a lender's ability to close a loan in a fair
and efficient manner has considerable value, so look for lenders
with good reputations and sufficient processing staffs, not just
those with the best rates. While better rates may certainly seem
attractive on the surface, it is more important to look at the big
picture. Paying 6.75 percent on a five-year, interest-only balloon
with two points up front, annual costs for audited financial
statements and significant closing feesnot to mention leaving the
borrower to scramble for refinancing in four yearsmay not be as
good of a choice as selecting a fixed rate of 8.75 percent for 20
years on a fully amortizing loan. As the cliché goes, always
make sure you are comparing oranges to oranges. When presented with
all of the facts, a savvy borrower will appreciate your
recommendation on overall value and hopefully not get caught up
solely in the rates.
Mike Boggiano is senior vice president, national sales
manager for Silver Hill Financial LLC. He may be reached at (877)
676-1562 or e-mail
[email protected].
