Are Commercial Mortgage Brokers Alive Or Dead In This Market?
Commercial Lenders do have money to lend and still need to buy loans. However in this post Sub Prime era, Lenders have a “back to reality” mentality.Direct Commercial Lenders still want good loans and will gladly fund loans that meet historic standards! Most of the “investors” that market to commercial brokers are not real lenders. They are correspondent lenders, who then wholesale their loans to the big bank lenders. The credit crunch has both constricted their lines of credit and their ability to sell into the secondary market. That is why Interbay, Silver Hill and others have cut back operations, downsized and given the commercial broker industry the perception that no one is presently lending.Actual demand for commercial loans is substantially up over 2007 and not being met with fundings. Therefore direct commercial lenders are having to become more reliant on both commercial and residential brokers who can weed out good commercial loans from bad. As a result, 2008 can certainly be a banner year for experienced professional commercial brokers or those who are willing and able to learn the intricacies of matching good loan requests with direct lenders who want that particular niche deal.Below are some quick tips to help YOU fund more commercial loans:· Partner with the right sources for your commercial loans· Don’t be greedy with your commissions. Earning a point on any commercial loan over $1M is normally sufficient. Two points on deals under $1M won’t raise lender flags.· Pretend that it is your money that you are lending. If you wouldn’t do the deal, don’t waste your lender’s time and your perceived level of expertise.Finally, focus on the right property niches, products and underwriting standards that will fund in this present market.Acquisition and Development deals are dead in this market. Fear has run lenders out of the business at this moment.Stated Income (No Doc) deals are rarely being funded now. The property will have to have a very strong cash flow, meaning a 1.25 or better DSCR. Expect purchase LTV’s at 70% or lower, 65% for rate & term refinances and 50% for cash out, and generally only if the cash is going back into the property.Investor deal are funding at 75% to 80% LTV, if the property strongly cash flows, the owner has at least 3+ years experience in the requested niche and amble liquidity.Be careful with hard money deals. Hard money lenders tend to live off due diligence fees in tough times to shelter their money until the economic smoke clears.Owner Occupied deals are being funded at between 80% and 90% LTV and rates are historically good. Professionals purchasing new office space can find 100% financing, including build out, so this market is hot right now!Knowing the market parameters will help you find fundable deals right now, — if the deals make economic sense and demonstrate strong cash flow. Screen out weak deals quickly so you can focus on the good ones.Debt Service Coverage is KING in this market!During the past 5 years of “Easy” money, even commercial lenders let DSCR’s slip so they could compete with other lenders and get their money on the street. The result was lower Cap Rates that inflated prices of commercial properties. The shock of the sub prime mess gave all lenders “religion” again and debt service ratios are back to historic norm’s of 1.2 to 1.3 which means properties appraised last year, say at $1M, will probably not cash flow enough to fund today at that price, under the “born again” DSCR rules.Forget past appraisal values! They mean nothing in this market. In today’s market, a new appraisal will depend solely on debt coverage to arrive at value. Comparables and Replacement Cost analysis is just fluff and will be discounted to support the value arrived at through acceptable debt service coverage analysis.As a Broker, it is your job is to educate your clientele of the realities of the present commercial financing market.If a deal won’t cash flow to a DSCR of 1.20 to 1.25, the assumed value of the property is too high for the normal buyer who wants 75% or higher financing. Remember, the higher the LTV of the loan, the tougher it will be to meet the necessary DSCR.No one can predict the future, but it appears that the paralyzing fear that has gripped the commercial market is waning. Spreads are slowly coming down. More securitized deals are being sold. All this bodes well for the brokers who understand the present market and choose their lender niches well.In good times and troubled times, businesses and investors always need new sources for capital. Supply and Demand always dictates that there are good deals that need funding today and there are lenders who are ready, willing and able to provide the funds.The key to success in this new era of commercial brokering is recognizing the realities of the present market, finding good loan requests that make economic sense and presenting them professionally to direct lenders that specialize in your loan’s niche.