How to survive in a shrinking marketplaceErik Leavell Esq.commercial lending "How do I survive the changes occurring in today's declining residential market?" Just about every mortgage broker is pondering this question in some form or fashion. While the information about current events is plentiful and the data from government agencies, banks and industry experts is even more abundant, the bold question left unasked is: "How do I grow business in today's market?" A matter of survival The simple reality is that when market conditions were near perfect in the residential lending arena, who among us was focused on mere survival? Answer: no one. Then why should our focus shift to survival now? It shouldn't! A changing marketplace is the perfect opportunity to evolve. This is our time to solidify relationships with our key customers, both clients and referral sources. This is your time to expand your professional skills to provide your customers/clients with more services. Have you considered commercial lending? Compared to residential lending, the commercial lending sector is a relatively uncluttered and untapped market. Many mortgage professionals want to get into commercial lending, but few take the time to pursue the education or invest in the infrastructure to make commercial lending a reality. Since there are essentially no simple how-to procedures and/or a free way to make the transition, the common conclusion reached by the less assertive mortgage professional all too often is that commercial is not a viable plan. How wrong! For the average and tech-savvy mortgage professional, commercial lending is a viable option that can be easily added to your current business pipeline. What intimidates people about commercial lending? Commercial lending is a different animal, but one that can be easily understood. To get a commercial loan approved requires a little more extensive underwriting by the mortgage professional than what is found in the residential lending sector. The commercial mortgage professional is typically responsible for preparing an overall analysis of a business, the property cash flow, assimilating client information into an expense sheet and calculating the projected debt service ratio for the property. Commercial lending also takes time - expect to spend about 10-20 hours on each file (substantially more on the first few files, as you will still be learning). Third, commercial lending requires you to invest time in your lender relationships. Commercial lending is not as matrix-qualification driven as residential lending, so a solid relationship can be the difference between either a loan approval or a loan rejection. Finally, commercial lending requires the broker to take the data he compiled and reformat it into a comprehensive loan submission package. The typical loan package has an income/expense report, a customized spreadsheet with the property's debt-coverage ratios, digital pictures from an on-site inspection, a detailed narrative about the property, a separate narrative about the surrounding area, and a detailed narrative about the borrowers and their ability to effectively manage the loan. A clean, complete loan package gives a degree of credibility to your proposed loan. Lenders (or banks) will take your request seriously, devote more time to your file and place your file at a higher priority because your complete loan package simplifies their demanding work schedule. In the end, the work on your loan package translates into a closed loan and the beloved commission. Why have others failed at commercial lending? There have been many mortgage professionals that sought to enter commercial lendingsome maintain a commercial lending service center and some pull out. If you ask a commercial broker why he had (or has) problems in the business, you would likely hear that the problems lie not in getting a client but in how to handle the client's loan once it lands on your desk. One of the principal reasons for this mishap is that the typical new commercial broker spends the start-up money on the wrong priorities - too much money is spent on new stationery, new phone lines, new fax lines, new business cards with fancy new logos and other miscellaneous office equipment and supplies. Unfortunately, by the time the money is spent on office stuff, there is little, or likely no, money available for education and support to develop the first loan proposal. Picture it: There is a loan on your desk worth anywhere from $10,000-$50,000 in commissions, and you have no money allocated for a plan to get that loan closed. No matter how many new office machines there are, no matter how attractive the logo, no matter the number of phone lines or the ease with which a lender or client may reach you - if your commercial loan proposal is not substance driven, then the loan is destined for failure. In the final analysis, the office described in this scenario does not have the supplies and equipment to convince a commercial loan underwriter that the loan on the desk is worthy of approval. How can a mortgage professional turn a commercial loan proposal for several hundred thousand dollars (or even several million dollars) into a closed loan with a $10,000-$50,000-plus commission? Partnership and guidance with established professionals. A simple, harsh reality is that a bank will not complete your proposal - if the commercial mortgage broker omits crucial information or the format appears difficult to read, then your file sits unattended until a rejection letter is ultimately issued by that lender. Moreover, there are no single source answers such as software packages to give the inexperienced commercial mortgage broker the step-by-step insight into completing a respectable loan proposal. As a result of the limited resources available to commercial mortgage brokers, the loan submission resembles a patchwork of guesses and intuitive hunches, which, as you now realize, doom the loan. However, there is a better way. There is a solid plan available to help new commercial brokers. Some commercial mortgage professionals who have worked in all aspects of the commercial business and recognize the absence of guidance and support for new commercial brokers see an opportunity to fill that void and, in the process, help new commercial brokers break into the business. How can commercial lending work for you? Commercial lending can be profitable, rewarding, at times entertaining and add more income to your bottom line. Instead of blindly entering the commercial arena, work with a professional organization that helps others to start commercial lending businesses. More importantly, work with a professional organization that will provide you with technical support on your first commercial transaction (or first few transactions if you so require); it is only by working with experienced, tested professionals that you will have the confidence and key components to deliver a strong commercial loan proposal to your lender. While no organization can guarantee that a loan will get approved, you can have the benefit of knowing your commercial loan proposal was professionally completed so that the bankers reviewing your proposal have a basis to respect its findings and a client reading your proposal for his project can respect your expertise. One of the easiest and most economically practical options for new commercial brokers is to utilize the services of a firm that sets up commercial brokers throughout the country. These companies act as net branch coordinators - new commercial brokerage businesses are given a similar framework in which to manage commercial loans and prepare quality loan submissions. Each office in this plan is independently owned, operated and managed. Each office is solely responsible for generating and managing its leads. There are no shared licenses and no regional supervisor giving orders. It is merely the framework in which to develop a successful commercial mortgage business. Many of the companies that start commercial mortgage businesses offer a menu-like form of pricing - for X amount of dollars, the company gets X services, whereas Y amount of dollars gets the company Y services. The menu-pricing plan allows the new commercial mortgage broker to invest an amount in the business that is appropriate for his/her level of business as well as desire to expand into the commercial field. At the risk of sounding redundant, the true benefit of pursuing the net branch commercial concept is that the company will give you support throughout your first deal or first few deals. One should keep in mind that the commercial loan support is not unlimited; rather, the support is typically capped at a mutually agreed upon number of hours that is largely determined by the class of service purchased. Hours in excess of the included hours are commonly billed at an hourly rate. How long does it take to recoup my money from commercial lending? Like anything else, the money made in commercial lending depends on the person. Typically, one to three closed commercial loans will cover the initial investment in starting a commercial lending business. If you are unable to close a couple of commercial loans in a year, then it is fairly clear cut that you are better off pursuing other interests. Erik Leavell Esq. is a licensed Florida attorney who has represented financial institutions, lenders and banks. He recently became general counsel for NetBranchCommercial.com, a non-profit company that helps mortgage professionals become organized in the commercial mortgage arena. He may be reached at [email protected].