Starting a Commercial Mortgage Broker Service

[Patrick Saco]

Hello. I was wondering what the best route would be to get this type of business up and running. I've never worked as a Real Estate Agent, I am not licensed. I've contemplated becoming a Commercial Agent, but can't really afford not making money for a year, so I figured I should educate myself.

As of right now I'm reading Real Estate Finance for Investing to learn how the financing side of real estate works and give me a better understanding.

What would you recommend for me to achieve this?

[Dion DePaoli]

I agree with what Bill has said, but from a different angle and history of experience I have some other thoughts to include.

In my past, I actually opened up a commercial loan division in one of the companies I use to run. It is important to note, this was after over 4 years in residential retail lending as a Director overseeing all our loans. Back then, it was likely a little easier than it is today. There use to be many commercial lenders and investors in the marketplace, just like the residential market. However, since the crash, that landscape has changed. There are far, far less now, almost to the point where it really is only banking institutions doing the majority of CRE and C&I Loans.

This is important to understand because if you are only brokering loans for finance. If there is nobody to broker to, it is tough to get any work done.

I think it only took one or two iterations of shopping deals before I started hearing terminology I had not been overly exposed to and dealing with concepts that were new to me. It also became clear the work load to simply have a file looked at was pretty darn involved. Commercial is different, more involved and has more moving pieces. It is, residential on steroids. Every aspect requires more detailed knowledge. Certainly folks are capable of learning, but trying to start in advanced math class before you know simple math can be a bit tough.

While going to school to get a degree in finance will help with the academic side, it is not the business. Learning how to calculate Net Present Value is important for sure. Once you know how to figure NPV, you still have learn where to find a deal, and where to put a deal. This then leads you to, learning why a deal does and does not work. In residential, the learning curve is smaller because the deviations from the middle are not that large. In commercial, they are huge.

Property types cause lending variations that make deals from one asset to the next be very heterogeneous. Writing a loan on a SFR compared to an Apartment Complex compared to Mixed Use is not all the same. The level of borrower complexity changes as well. Natural persons are usually your typical residential borrower. In commercial, mix in natural persons, companies owned by natural persons, companies owned by companies owned by natural persons....etc.

If that wasn't enough, understand as well, that usually the laymen refers to all things not residential as "commercial". There are sub-categories in the world of non-residential loans. Lending can take place with the property as collateral or it can have other types of assets, such accounts receivable or equipment mixed in.

So, I think you get the point. It is for these reasons that folks try and break into the world of brokering non-residential loans and have a very tough time which prompts a long period of time to actually get your fist deal done. Mind you, that first deal is not going to be the home run deal where you turn into a fortune 500 company overnight. More often than not, it is smaller in size and looks more like a residential loan, from a loan amount perspective than not.

Now let me say a couple positive things. I too, developed a desire to work with commercial over residential back in the day. The borrowers are more sophisticated with a little bit more of a 'maturity' toward getting a deal done. There are good places to work where you can learn the commercial lending side of things. More often those places, such as a bank, offer salaries which sure makes learning easier on the pocketbook.

Starting your own Commercial Loan Brokerage, is not something I would suggest you attempt. To contrast the uphill battle, your current knowledge would have to compete with folks like or similar to Bill and myself. Don't take this the wrong way, we have likely forgot more than you know right now. We would even have challenges starting a brokerage company right now in this climate as well. So, I like the idea of working with an established company but I think you should put opening up your own company into a longer term plan after several years.

To address the question, do loan brokers make more money than real estate agents right now. Well, that too is complicated. The commercial RE agents I know have a mixed bag of business in the market today, where leasing is a major supplement to their income. Commercial deals take longer than residential so you can starve between closings with no small stream of income in between. Some of the feedback you might hear could also be from residential agents trying to break into the commercial market but their brokerage has no history of commercial deals. So some horror stories are from those folks. For some good commercial agent feedback, go talk to folks with CCIM and other designations who will be a better barometer of the industry than those who tried and failed.

You might want to look for part time jobs (or full, depending on your schedule) and even internships with firms that are involved in the commercial sector. That will certainly help get exposure to the industry. You may find that other aspects of the business are even more attractive to you such as working with Capital Markets side of the industry. I guess the point is, right now you have some ideas of what you seem to like and not like but you also have not had a rounded exposure to the industry. There is a chance a different segment of the industry is even more inviting to you than what you believe today. The plan I would say is find a path that allows you to gain that exposure and be prepared to modify your goals as you discover things you didn't know.