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?

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.

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.

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.

Elias Halvorson · Answer

I would say clients probably prefer whomever the agent recommends. If they knew the difference only a few clients would ever choose to go to banks, and that would likely be due to niche programs (Like Bank Of America's Physician loans).

Erik Estrada · Answer

I can see that. But from my conversations with new clients I have found that they really want a hands on experience instead of a broker taking care of the file for them. They trust themselves more than a broker that does mortgages for a living.

I have also found that they believe they will get a better response talking to the lender directly rather than having a broker filter communications.

I guess it really just depends on the client. We can't win them all.

Why do some Investors prefer direct lenders over broker shops?

Most Popular Reply