The key to closing more commercial loansBrian L. Peartanalysis, LIBOR ARM, rolling equity line, investment, amortization, credit score
The most important part of doing commercial loans is not putting
the package together or sending it out to 20 lenders. It happens
before that. The most important part is the up-front needs
analysis, in which you make sure you have a deal and, most
importantly, find out what the customer really needs. But most
people never do this part of the loan origination process.
The most important question you can ask a commercial client is:
"What type of return-on-investment (ROI) are you looking for?" You
see, that client will call up and say, "I want to buy such and
such. What is your rate?" Most brokers, somewhat out of habit and
partially because they are impressed with this client, immediately
try to answer this rate question with a rate! However, you can't
answer that question, because you don't know what you have until
you get their docs. In fact, the rate can be anything from a five
percent LIBOR ARM to a 14 percent hard money deal, depending on the
needs of the client. The customer who needs to close in two weeks
will have to deal with 12 percent hard money, even if he has a
credit score of 750.
Commercial loans can be broken into various scenarios based on
the needs of the client. It may be necessary to get part of the
loan fixed and part of it on a rolling equity line. With a
commercial loan, you can do that without getting two separate
loans. You can get the customer a rate that is fixed now then
adjusts, or is adjustable now and becomes fixed. The potential is
unlimited because banks are loaning their own money.
So ask your commercial customers, "What are your goals?" For
most commercial properties, the answer is "investment." Because of
that, you must get a figure on their required ROI. If you get them
a six percent rate, but it balloons in five years and the
amortization is only 15 years, then they may be better off on a
seven percent rate with a 30-year amortization. The payment is
less, even though the rate is one percent higher. That difference
may influence getting the deal bought and hitting the client's ROI
Most investors do not figure their ROI on commercial properties,
even though that is what they are doing - investing. How can a
smart person with money buy a strip mall and never ask for the rent
rolls to see what it is he is buying? He could be buying a dog with
fleas. However, when he comes to us, we ask for the rent rolls to
determine whether we can even lend to him, and you should too. If
his credit score is 700 and he has $250,000 to put down on a
$1,000,000 purchase, one would think he is strong. But if the
property has a negative cash flow, you can't get that deal bought
with decent rates. In reality, the customer should not buy it! He
will lose money every month unless he has some tenants in his back
A denial in commercial is usually a blessing in disguise for the
customer because it keeps him from making a bad mistake. In the
future, when someone calls, ask him about the property, goals and
ROI; then crunch the numbers. You may be surprised at the results!
An up-front needs analysis will move you from a commodity (rate) to
a consultant and will build your business as people talk about your
knowledge and seek your advice. Screen the deals properly up front,
find out their true needs and watch your volume soar!
Brian L. Peart is president and the founder of Nexus Financial Group Inc.
and the publisher of the Top Producer training course. He may be
reached at (866) 355-1244, ext. 2225 or e-mail firstname.lastname@example.org.
To request his pre-qualification form as a guide to a proper needs
analysis, e-mail email@example.com.