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Residential and commercial: Working together

William Pape
Jan 28, 2010

There are all types of direct relationships: Personal-business-client-lender-etc., in the lending world. But, there are also relationships built within a larger framework of our industry and beyond the scope of your daily connections. Let’s consider the relationship between the residential and commercial mortgage broker. This relationship may take us out of our norms and into a temporary, or even an evolving, association that may lead to a long-term alliance. Relationships that work must allow for both parties to contribute so that the sum of the results of the work of both parties is greater than the sum of the work of the two individuals considered separately. Generally, the beginning of this relationship occurs when the residential mortgage broker needs help in obtaining financing for a commercial property, with which he or she is not familiar. The commercial broker must have already cultivated a measure of confidence within the residential brokerage community or they would not have been called upon to co-broker the commercial transaction. Co-brokerage of a specific transaction is the evolution of the relationship between the residential and the commercial loan broker. So, how do you build this relationship between the residential and commercial broker, when there is limited interaction between the parties and their interests are really not the same, except for the fact that both seek financing for their respective client? Generally, it is often the commercial broker who seeks out the residential broker, who may, in the future, have a commercial transaction come across their desk that they cannot handle for the client. Typically, a social relationship begins even prior to a possible working relationship. Of course, at times, the residential broker has an inquiry from a client regarding a commercial transaction and initiates the relationship with a qualified commercial broker or at least attempts to find someone to help them complete the commercial transaction. If I were the commercial broker, in order to develop these contacts, I would first consider joining the local, state and/or national organization that best represents both brokerages. This affiliation adds credibility to your endeavors to work as a co-broker. Second, I would try to educate your local residential brokers so that they may determine if they are really considering a “do-able” transaction. Third, I would offer assistance to anyone interested in learning more about evaluating commercial transactions. Whereas, if I were the residential broker, first, I would determine what areas of interest the various commercial mortgage brokers have, i.e. multi-family, small or large commercial, SBA, specialty or other types of properties. Second, I would determine the success rate of the potential co-broker. Third, I would determine what specific expectancies the commercial broker had in regard to my involvement in the transaction. Fourth, an equitable fee split arrangement must be agreed upon and a document signed. In both cases, references should be exchanged and considered and everything should be in writing. Very few “partnerships” are successful in the long-term. Consider those business partnerships of which you are aware and calculate how many have lasted say 10 years. Why? There may be a number of reasons: 1. Simply that one partner feels that he does not need the other partner; 2. One feels he is doing the majority of the work and only receiving a small percentage of the income; 3. One want to be “the boss;” and 4. One does not like the way the business is going, etc. Partnerships just don’t last very long. So, the answer may be to look at a co-brokerage or a referral relationship as being different than a true partnership. You can do that, if you have clearly defined the obligations of both parties. In a “referral” relationship, the referring entity is simply expecting a small pre-agreed fee to introduce the potential commercial client to the commercial broker. In a co-brokerage relationship, both parties are working together to obtain the financing for the client. Complexities can occur … is the referral fee to be paid for each separate transaction in the future? Who has the contract with the borrower? How much will the fee be? What happens if, in the future, the client contacts the commercial broker directly? The same questions come up in a co-brokerage arrangement with the addition of: 1. What work will be completed by each party? 2. Will all future business be split the same way between the parties? 3. Who has the relationship with the lender and what happens to that contact, if the two brokers separate? 4. Are you sharing forms, documents, etc.? The bottom line is that both the residential and the commercial broker should assume that the relationship will not be long-lived and decide in their early negotiations how any future concerns may be handled. Certainly there are a number of things that one must consider prior to entering into a referral or co-brokerage relationship with another broker. In real estate, the slogan of greatest importance seems to be “location, location, location.” In financing, the greatest concern should be “ethics, ethics, ethics.” The ramifications of not taking the relationship between brokers seriously can be devastating to both parties. Have you thought about your licensing and your ability to continue to work in our industry? If you are a residential broker, whether you refer a client to a commercial broker or you enter into a co-brokerage relationship, you are probably receiving some compensation. Don’t you think that that means you have some fiduciary relationship to the client? If the client feels as though he has not been treated fairly, he undoubtedly will go back to the referring broker to vent his anger and maybe even request financial compensation. So, what to do? You should check references, qualifications, confirm licensing and general reputation before making a referral to anyone you do not personally know well. You should review the contract that your client is expected to sign. Are you a party to the contract? Does the client know exactly what role you are playing in the transaction? As a commercial broker working in concert with a residential broker to provide financing for one of the residential broker’s clients, you must consider your reputation within the lending community. Do your due diligence. Speak directly with the client and ascertain what, if any, information has been provided to the client by the residential broker. Does the potential client understand what is expected of him? Does he know what the residential broker’s role is in the financing endeavor? Does the client have any questions regarding the fee agreement? Are his expected financing results realistic? Networking is possible within a multitude of areas. We have stressed the relationship between the residential and commercial mortgage broker, but other networking relationships are also available to both the residential and commercial broker. Not only do you have the possibilities within professional lending associations, but also within real estate and other organizations such as the national and local realtors’ associations, Certified Commercial Investment Members (CCIMs), Members of the Appraisal Institute (MAIs), financial advisors, insurance professionals, etc., but also with lenders, title companies and others either directly or indirectly related to the financing industry. One of the reasons that I have had some success in developing relationships within other professional groups is that I have continued to pursue professional designations within not only the lending industry, but also the financial services industry. It is much easier to “sell” yourself to other professionals, if you have the back-up of academic degrees or professional designations. We can all continue to educate ourselves—so take continuing education whenever it is available. Good relationships are time-consuming and require effort on your part. It takes a long time to develop a sense of confidence within your fellow brokers, but only one mistake to ruin that relationship. Most things that are worthwhile are worth working hard to get. So get out there and develop great relationships with your residential or commercial counterpart and be more successful than you already are. William Pape, MSFS, CMC is with Commercial Mortgage Brokers, a company with offices in Arizona and Missouri. He has been a commercial mortgage broker for more than 20 years and handles only commercial transactions in excess of $1 million on a national basis. He served on the National Association of Mortgage Brokers (NAMB) board of directors for five years and directed six national commercial conferences for NAMB.
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