Commercial Mortgage Brokers Can Negotiate Better Rates and Terms While Increasing Your Chance of Closing
If you’re considering buying a multifamily or commercial property, getting the right loan is key. Every investor knows that leverage increases your returns, and allows you to purchase a lot more real estate for your hard-earned cash. Just like when buying residential property, you can approach a lender directly, or go through a commercial mortgage broker. While it might be tempting to go it alone and start approaching lenders yourself, there are a variety of reasons why using a broker could be a better call.
Using a commercial mortgage broker presents a wide variety of benefits for the potential commercial real estate investor. These include the wide array of loan types and lenders that a broker will be familiar with, the increased negotiating power a commercial loan broker provides, and the fact that a broker can guide you through each stage of the loan application and approval process, giving you a better chance of closing.
In this article, we explore four major reasons why you may want to consider using a commercial mortgage broker. These include the fact that commercial mortgage brokers can guide you through various loan types, can negotiate better fees and terms for your loan, prevent you from paying high application fees to multiple lenders, and increase the chance that you will close on your loan. We also discuss how to select a good loan broker to give you the best chance for success.
1. Commercial Mortgage Brokers Can Guide You Through Various Loan Types
When it comes to financing multifamily and commercial real estate, many first-time (or even somewhat experienced) borrowers think that a bank is their only option. In reality, this is far from the truth. In today’s world, banks and credit unions do play a part, however, there are many more options on the table.
While each of these loans is a completely different animal in terms of closing, there are also tens (and sometimes hundreds) of lenders that offer these loans. A commercial loan broker can be your guide in navigating each of these loan types and helping you select the best one for your individual situation.
Non-bank real estate loan types include:
Fannie Mae and Freddie Mac Multifamily Loans: These loans, which are exclusively for multifamily properties, are non-recourse, and typically have terms between 5 and 20 years with amortizations between 20 and 30 years. Both Fannie and Freddie also have excellent small balance loan programs, with Fannie Mae Small Loans starting at just $750,000 and Freddie Mac Small Balance Loans (SBL) starting at just $1 million. These loans are generally for well-qualified borrowers with high credit scores and a net worth (excluding primary residence) of at least 100% of the loan amount. Fannie and Freddie also offer loan options for mobile home parks, senior housing, and student housing properties.
HUD Multifamily Loans: For those looking to refinance a multifamily property, the HUD 223)(f) loan program offers fixed-rate, fully-amortizing, non-recourse loan terms up to 35 years, with LTVs up to 85% for market-rate properties and up to 90% for Section 8 properties. Despite the great terms, HUD 223(f) loans require a wide array of third-party reports, including a specialized appraisal and capital needs assessment (CNA), HUD’s version of a property condition assessment (PCA). This means that closing timelines can be quite long (often 6 months) it can be very difficult for a borrower to successfully get approved without the guidance of a commercial loan broker.
For ground-up multifamily construction or substantial rehabilitation, the HUD 221(d)(4) program also offers the same leverage as the 223(f) program, with non-recourse terms of up to 40 years (plus a 3-year interest-only construction period). These loans are fantastic for developers, but are even more difficult to close than 223(f) loans, often taking 8 months to 1 year from start to finish. Just like the 223(f) program, going through the application process without an experienced intermediary can be a serious headache.
CMBS Loans: For both multifamily and non-multifamily commercial properties, non-recourse CMBS loans, which start at $2 million, and have highly competitive interest rates, can often be a great option. However, these loans can also have a variety of pitfalls that may appear around closing time, including high lender legal fees, highly complex loan agreements, and restrictions on any planned improvements to the property. CMBS loans are ideal for borrowers who have lower net worth, as they often only require a borrower to have funds worth between 25-50% of the total loan amount, with 5-10% liquidity.
Hard Money and Private Money Loans: These loans typically have the highest rates and fees, but are often suitable for borrowers with a low net worth, poorer credit, or legal issues who simply may not be able to qualify for loans from a bank, agency, or CMBS lender. There are thousands of hard money and private money lenders in the U.S. alone, with varying rates, terms, and lender reputations, and a good loan broker can help you sort through the pack while negotiating down the often sky-high fees and interest rates that these loans are notorious for.
Private Debt Funds: Private debt funds offer higher-interest loans for deals that a bank or agency lender might not be willing to, but at lower rates than hard money lenders. Private debt fund relationships are difficult to acquire unless you’re already in the industry, so it’s difficult to access these capital sources unless you have an experienced loan broker on your side.
2. Commercial Mortgage Brokers Can Negotiate Better Rates, Terms, and Fees
When it comes to getting great terms on your commercial real estate loan, selecting the right loan program may be the most important piece of the puzzle. However, even working within the somewhat rigid guidelines of a specific loan program, different lenders will lend under different guidelines. A loan broker can often negotiate longer loan terms, longer amortizations, lower interest rates, and lower origination or application fees, greatly reducing the cost of your loan.
For instance, a lender may be willing to offer a slightly lower rate, or a partial or full-term interest-only period for a loan, even using the exact same program type. Some lenders may be willing only to offer a 5-year term, while others may offer up to 20 years, depending on their different risk interpretations.
By having a large rolodex of lenders, a good commercial mortgage broker can pit each of these lenders against each other to get you the best possible loan for your individual circumstances.
For example, if one lender is willing to offer a 10-year term with a lower interest rate, and another offers a 20-year term with a higher interest rate, your broker might approach the lender offering the 10-year term in an attempt to convince them to extend the term of the loan. In addition, a mortgage broker may be able to convince the lender to extend the amortization period of your loan, which reduces your monthly costs and increases cash flow.
For instance, on a $1 million loan with a 5% interest rate, a 20-year amortization period would leave you with a monthly principal and interest payment of $6,599.56, while extending the amortization period to 25 years would reduce your monthly payment to $5,845.90, a difference of more than $750 a month or more than $9,000 per year.
In many cases, a mortgage broker may also be able to negotiate down the application or origination fees of the loan, particularly if they have a long-term relationship with a particular lender and have sent them a significant amount of business in the past.
3. Commercial Loan Brokers Mitigate The Risk of Working With a Single Lender
When it comes to getting a commercial real estate loan, working with a single lender (or even a few) can seem like the simplest route, but in reality, it might give you more of a headache than you expected.
For example, a lender may pre-approve your loan and charge a high application fee, often several thousand dollars, and, in the end, may not approve your loan due to issues that arise pre-closing, such as an appraisal that comes in below the perceived purchase price, or a bad environmental assessment. While rare, some unethical lenders may even charge application fees to a borrower they are not likely to approve simply to pad their pockets.
While you can’t directly prevent these issues from popping up, by using a broker that can shop your deal to tens or even hundreds of lenders simultaneously, you can often avoid going through the entire process only to be denied at the end. A good mortgage broker will understand the desired requirements and potential pitfalls of each lender they work with, and can often steer you out of working with unethical lenders or those with especially stringent lending guidelines.
4. Commercial Loan Brokers Can Get You Across The Finish Line
A good commercial mortgage broker is like a coach and has an in-depth understanding of each part of the commercial loan application and approval process. The best brokers are extremely hands-on, and will carefully examine each third-party report in an attempt to make sure it conforms to the lender’s expectations.
For instance, if the appraisal comes in below the purchase price, they may look for a second opinion. If there are potential zoning issues with the property, they may contact the city or county in an attempt to secure you a conditional use permit (CUP) or some type of temporary variance. All of this increases the chance that your commercial loan will close on time and on budget.
In addition to helping organize and submit each part of your loan application, your loan broker will also often use an in-house analyst to prepare a debt offering statement for the lender, which saves the lender time and can greatly increase the chance of closing.
In addition to this, good commercial loan brokers have a wide depth of relationships, including lawyers, accountants, appraisers, and other pros that they work with regularly. This can prevent you from unintentionally using low-quality service providers or overpaying for services.
How Commercial Loan Brokers Charge Their Clients
While you may think that using a loan broker is expensive, that’s usually not the case. Commercial loan brokers charge in a variety of ways. Some will charge an upfront fee for guiding you to a lender, while some may charge you a percentage of the loan (usually no more than 0.5-1%) at closing, or some combination of the two.
However, many brokers actually don’t charge borrowers anything, and instead, take a referral fee from the lender when the loan closes. Therefore, in some situations, you can get all of the benefits of a loan broker’s guidance with none of the financial drawbacks.
How to Choose a Commercial Mortgage Broker
Now that you understand some of the benefits of using a commercial mortgage broker, you might be wondering how to choose one. In general, one of the best ways to locate a great loan broker is through your existing network, which could include commercial real estate brokers, lawyers, accountants, or fellow investors.
If one or more people you trust have already worked with a commercial loan broker on one or more deals and have had a great experience, they may be worth checking out. You can also, of course, research online, which is often a great place to start.
Just like choosing a great commercial real estate broker, choosing the right commercial loan broker is essential. Sketchy brokers have been known to charge high upfront fees, and even claim to be lenders when they’re not, so you’ll want to avoid these types of brokers at all costs.
Unless you have a lot of capital and are looking at a very large deal, you might want to avoid institutional loan brokerages, as they may not put much effort into smaller customers. On the other hand, you may not always want to work with a tiny brokerage, as they might not have enough relationships to get you the best terms on your loan.
In general, when deciding between commercial loan brokers and brokerages, you should look for a few things, including reputation, lender and industry relationships, experience, and customer service.
Reputation: You can usually determine a loan broker’s reputation through relatively obvious methods, such as reading online reviews, news articles, and online testimonials, seeing the various organizations they belong to, and what (if any) certifications they may have. To get a clearer picture, you can always directly ask the loan broker for references from happy customers.
Lender and Industry Relationships: It can be difficult to determine a loan broker’s depth of lender and industry relationships, but it can’t hurt to ask how many lenders (and which lenders) a loan broker usually works with.
Experience: In terms of experience, you’ll likely want to work with a loan broker or brokerage firm with at least a few years of experience in the field. If the firm is brand new, make sure that, at the very least, the head broker or owner has significant experience working in capital markets at other brokerages.
Customer Service: It may seem obvious, but if your customer service experience with a loan broker or brokerage starts out poorly, it’s probably not going to get better over time. A good broker will, within reason, be proactive in reaching out to you about the status of your loan, and will respond relatively quickly to your calls, texts, or emails.
In addition, it should be noted that, somewhat unlike a commercial real estate broker, it’s usually considered fair to shop at multiple loan brokerages until you find the deal that best fits you, so if you feel like one broker isn’t getting you the terms you expected from a lender, you can always look elsewhere.
In general, in the United States, unlike residential mortgage brokers, commercial loan brokers do not need a license.
In Conclusion: Finding The Right Commercial Mortgage Broker Can Make a World of Difference
Getting the right financing can make a huge impact on the overall profitability of any commercial real estate investment. One mortgage point or five more years of amortization can save you hundreds of thousands and sometimes millions of dollars during the life of your investment. Unless you’re the most seasoned of pros, taking months to sort through the many loan programs and thousands of lenders out there simply isn’t realistic for most investors.
Just like you wouldn’t represent yourself in court, you probably shouldn’t be arranging financing for your property. Of course, there are some expectations. For instance, if you want to refinance a loan with your original lender, and they’re offering you great terms, there may be no need to bring a loan broker into the picture. However, these scenarios are the exception, and, the vast majority of the time, having a great commercial mortgage broker on your team can make a world of difference.