Why do some Investors prefer direct lenders over broker shops?

Question

I am curious why some clients hate working with brokers? Do they feel they have more control working directly with a lender? Is it a lack of trust? Do they feel they are getting a better deal by going direct?

Chris Seveney · Answer

Some brokers will tell you whatever you want to here and have little experience, it is like real estate wholesaling. Unfortunately its got a low barrier to entry. If you have a good broker they are worth their weight in gold, but they are not easy to find.

Jason Taken · Answer

It could be a better deal - although the good brokers have the connections with lenders where the pricing is the same. In working with many clients as a broker over the years - the issue I discovered from really just talking to them is a lot of brokers are living deal-to-deal and don't really have a business set up - so there's commission breath going around plus the fact that instead of giving the current client white glove service, they are already looking for the next loan to close and often consider the one in the pipeline already in the bag.

Just my experience.

Stuart Udis · Answer

I used a broker for the first time 5 years ago. It was truly hands off experience. All communication flowed directly through the broker. The lender they selected for me was a small bank for a $914,000 construction loan to build a 4-unit condominium building. There were a lot of requests, but the broker was very organized and managed the process well. The terms were great, no complaints until I began drawing down on the loan. The draw process was slow and they had a poor construction loan administration process. It was manageable, just a headache. Then we got hit with the covid shut down for a few months followed up by supply chain delays. Fortunately, the building was already framed so I didn't get hit with extreme overages, but the delays did cause me to miss the sales covenant. I was obligated to pay off $300,000 of the loan balance within 16 months as one of the conditions of the loan.

There were a few errors my GC made, and while I knew they were fixable, the thought of dealing with homeowners not knowing whether the GC would honor the builders warranty felt like more of a headache then owning the units as rentals and selling the units down the road once the defects were cured. With the market uncertainty and low interest rates, I notified the lender I would be leasing the units and would miss the sales covenant. I got a simple "ok" email back. A few months later I received a default notice letter in the mail, didn't even have the decency to let me know by call or email even if they were obligated to send the written notification. The default rate added 5% to my rate. A few months later I refinanced the building and received a $2,030,000 appraisal. I believe the true value was closer to $1.8M but got favorable values on each unit. Nevertheless, sent the appraisals to the bank along with the payoff request and informed the lender my 45% LTV loan was the least of their worries, and I would never bank with them again. A peer of mine originated a loan around the same time with the same lender through the same broker. Their loan was construction to permanent and similarly the lender would not honor the permanent rate built into the loan because he missed the sales covenant.

The broker did nothing wrong, the broker obtained good loan terms. But there's more to loan originations than price and leverage, particularly for construction loans. Brokers compete on price as they should. It's how they can demonstrate value. However, the administration part of the loan process is an afterthought. I will never use a broker for a construction loan again. I want direct communication and the opportunity to feel out the lender. I am screening them just as much as they are screening me.

Right now I am dealing with a situation which will likely go down as the craziest in my career. Originated a rather large construction loan for a new construction building only to find out the contractor made some serious errors. Don't want to put too much out there since there's ongoing litigation but in this case, my lender is supporting me in the redesign, giving me access to contingency funds and being patient. That's the value of the relationship.

I've used brokers since for permanent take-out loans. In instances like that where servicing is straight forward, I see no harm in getting the best terms on price and leverage. However, I will never use a broker again for a construction loan because a loan broker is not conditioned to prioritize what's most important to me. I don't blame the brokers either because they earn their commissions competing on price and leverage. Had I used the same lender I described earlier in the story with my current situation, it would have been far messier of a situation.

Mike Grudzien · Answer

There's good brokers and bad brokers. Vast majority of customers don't know the difference, don't have the experience/long term relationships and don't have the sophistication to ask the right questions.

Amir Khan · Answer

@Erik Estrada in our specific niche/asset class/price point, there are no brokers who can offer funding. We had no choice but to create our own advance systems and strategies to find private money lenders. Therefore, now we exclusively work directly with private money lenders.

Jill F. · Answer

This day and age it's hard to know who is a scammer and who isn't. If I go to a brick and mortar bank and talk to a loan officer, I know I am talking to a legit lender.

Steve Vaughan · Answer

No origination fees and get to support neighbors in smaller banks/CUs that give back to my community.

James Stout · Answer

@Erik Estrada good question. From what I’ve seen, it usually comes down to perception and past experience:

• Control: Some investors think going direct gives them faster answers and fewer “middlemen” in the process.
• Cost: A few focus purely on fees and assume cutting out a broker = cheaper deal.
• Trust: If someone had a bad experience with a broker (overpromising, last-minute changes, etc.), they may swear off brokers altogether.

Control: Some investors think going direct gives them faster answers and fewer “middlemen” in the process.

Cost: A few focus purely on fees and assume cutting out a broker = cheaper deal.

Trust: If someone had a bad experience with a broker (overpromising, last-minute changes, etc.), they may swear off brokers altogether.

That said, a good broker can be invaluable. The right one already knows which lenders are a fit, which shops play games, and which ones service loans well after closing. That saves time, avoids headaches, and often nets better overall terms.

I think the real answer is: inexperienced or transactional brokers create that “bad taste,” but experienced brokers are worth their weight in gold.

Nick Belsky · Answer

@Stuart Udis

I appreciate a post like this. Not only does this demonstrate your rational assessment of what happened but also shows the difference between a good broker and a great broker. So many brokers out there focus primarily on DSCR loans in the residential space only, and as I am sure you've seen/heard, not all are created equally. Most only offer Fix and Flip and Construction loans as they come up.

There are many of us whom focus more on Fix and Flip, Construction, Development, and Commercial properties and do DSCR as a side offering for clients. When dealing with more complex loan structures it is imperative that we get to know our clients and what they want/expect from us and the products we show them. We always make it a point to present several options and the pros and cons of each product and lender nuances. We know our capital partners and how they underwrite, service, and manage construction draws well. I had a client just recently whom emphasized high leverage but quick, non-cumbersome draws. The normal lenders we use for high leverage tend to have a slower draw process, so we showed them those options as well as a few others with slightly lower leverage, slightly higher costs, but lightning fast draws. We present the options so our clients can make the decision which way they want to go.

Knowing these pieces and understanding our clients is how we've become so successful and why over 65% of our business is repeat clients. We also enjoy co-brokering with other brokers to help them out when they are overwhelmed or have deals that they are not familiar with the loan products or options. IMO, brokers who are only showing the lowest costs and best rates are doing ok, but not really forming a partnership with their clients. Nothing wrong with that business model! But, for us, we take pride in providing the best experience we can and creating a repeatable relationship with our clients. I feel that puts us a notch or two above those that don't.

Cheers!

Why do some Investors prefer direct lenders over broker shops?

Why do some Investors prefer direct lenders over broker shops?

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