The Big Taboo in Private Lending for Commercial Real Estate
My wife, Monalisa and I just celebrated our 24th anniversary. She is my soul mate and I could never have found a better person to spend my life with. We have truly loved and respected each other all these years and are the perfect match.
The Perfect Match
By now you know that I am an Agent representing Private Lenders for Commercial Real Estate. Those of us in this business specialize in certain types of loans, based on the offerings of our Lending Groups. One of the problems in this industry is that the lending groups are looking for the perfect match.
This article may seem self-deprecating as I try to give a realistic view of Private Lending Groups for Commercial Real Estate. Many agents contact me with loan requests that were turned down by their lender. Instead of walking away, they try to find someone who can solve their problem. We all do this because we want to help our clients. That should be a good thing, but it is frowned upon by the Lending Groups.
The Modern Marketing Concept
In the 1900s, marketing meant identifying strategies and tactics for simply selling more products and services with little regard for what customers really wanted. That changed in the 1950s when competition increased. The modern marketing concept suggests first knowing the customer and what they want before developing and marketing products and services.
Private Lending Groups tell the world they have Billions to lend but make it almost impossible for most borrowers to meet their criteria. They don’t tell you what the product is, because each deal is evaluated on its own merit. It seems that Private Lending for CRE is an industry that defies modern marketing concepts.
Fear of Competition
Private Lenders do not advertise their product, rates, terms, lending criteria, or maximums. They try to stay competitive by limiting information that may be leaked to their competitors. Instead, they rely on independent agents to try to differentiate their product by offering additional services. Communication is limited and there are no written agreements, other than the NCNDA. An agent submits a loan to the lender and prays that the lender will accept the deal.
The Lender – Agent Relationship
Try to imagine working in an industry where you work 10-12 hours a day, 7 days a week, and don’t get paid for months at a time. You really don’t know when you will get your next paycheck. In many cases the agent pays for this privilege! The agent submits deal after deal to a lender, until he gets frustrated and takes his deals elsewhere. The borrower gets frustrated and takes his deals to another agent. The Lender may recognize the deal as it was submitted by another agent, so it is immediately denied. The fact is Private Lending Agents have no allegiance to the lenders they represent.
The Big Taboo – Loan Shopping
Private Lending Groups don’t care how much time or effort the agent has put into bringing them business. If they make you an offer, you better accept it. Don’t even think of questioning the rates, terms, or commissions. They will label you as a loan shopper. I get nervous even thinking about this term.
Loan-shoppers are time-wasters. If the lender is just going to review the executive summary, what time have they invested? If they are interested and want to spend time on the package, then there should be a commitment from the buyer and the broker to work exclusively with the lender.
The Problem
Many of the people who contact me are looking for equity lending on real estate construction or multifamily funding. Many deals are difficult to fund and require an additional cash commitment to make it work. So, I have a discussion with the borrower and get them to put more cash into the deal.
The problem is when I send a deal to my lending group and find out that the lending group has already seen and rejected the deal because another broker submitted the request at a lower LTV. The lender will not look at the deal a second time because they have already reviewed the project and rejected it. It doesn’t matter if the borrower’s cash position has improved.
The Solution
When I believe that a lending group may not approve a loan request, I am prepared to shop the loan. The difference is I do it serially, waiting for my lender to reject the request. Then I fix the problem and prepare a cover letter for the next lender explaining how the borrower has improved his/her position.
Virtually all Private Lenders in Commercial Real Estate will lend 65% LTV to purchase or refinance apartments, office buildings, or other income generating properties. How do they differentiate themselves? They don’t. That is why I continue to establish relationships with new lenders to expand my offering to help investors make money. Offering different loan types, including construction, hotels, shopping centers, senior living, NNN, and other categories is a way to differentiate myself from the rest of the pack.