How to interview commercial lenders?

Question

BP Family -

Soon I’ll be in the market for a commercial loan. I’ll be buying a 5-20 unit apartment building. I am a residential real estate agent, so I have a lot of experience talking with residential lenders about all kinds of things. I can spot the good ones from the bad ones. But on the commercial side, what questions should I be asking these commercial lenders to ensure I’m getting a good lender? Are there any common mistakes you’ve made when interviewing a lender that you could share with me so I don’t make the same mistake? Thanks in advance!

James Kojo · Answer

@Edward Stephens

To be honest, the question that will filter 90+% of the people you talk to will be: are you interested in working with me?

5-20 units is on the smaller side of commercial transaction, so you'll have to find players that work in that niche. Some of the larger players are willing to talk with you if they think you're going to move-up the value chain, and some are not.

If you are in the loan-limit size of $1M-7.5M, you'll then qualify for Freddie Mac SBL program (which is a great program, btw.) You'll be able to find at least a handful of local brokers willing to work with you on those.

Any smaller than that, you're probably talking to local banks and credit unions. You'll have to know somebody-that-knows-somebody to find those folks, or you can just make a lot of phone calls.

I have done all of the above, if you have specification questions on any.

After that, you can get into terms such as ammo, term, rates, pre-pays etc.

Finally, my last bit of advise is to go with someone local to the market. Commercial real-estate is much more hands-on in terms of lenders, so you'll want someone who knows the intricacies of the particular market.

Hope that helps.

James

Jamie Grubb · Answer

@Edward Stephens Here are some of the questions I would ask a commercial lender - What size loans can you work on? What size loans are your 'sweet spot'?  What area do you cover?  What are the criteria that you look for in a Borrower/Property? What does your typical borrower look like?

I would lay out what you are looking for, give your qualifications, and see if the lender will be a good fit.

All lenders have the same product (money), but where they vary is going to be the source of funding, communication level, reliability, and the certainty of execution.

Timothy Hero · Answer

As James mentioned, lenders want your business, sure. But 5-20 doesn't grab their attention like the 50+ units do. The sort of lenders favor loans between $5M - $10M. It's their sweet spot for most of them. It's enough to offer high returns, yet not tie too much of their capital up in one deal.

With a 5-20 unit, you should focus on who works best for you and your goals. I can answer your questions and give my input if you'd like to hop on a call.

James Kojo · Answer

@Edward Stephens In my response, i didn't mean to imply that you're too small to do business with. Just that each broker has a range in which they typically work in as they tend to carve out a small niche for themselves. Very few of them will actually tell you that they don't want to work with you, but if you're talking with a broker who typically does $20-100M deals, you can guess where you will be on the pecking order if there is any sort of conflict for time.

That said, there's a little bit of a weird dead spot in the 5-20 unit range. They often won't qualify for "agency" debt (Fannie/Freddie commercial), CMBS or life-cos. However, anything greater than 4 units won't qualify for residential debt, for which brokers are a dime-a-dozen (sorry, residential brokers!)

So, you're usually looking at local banks for that type of deal, and almost all of them will be looking for recourse-debt. There are no centralized repositories that I know of for finding them, so you really have to know-someone-that-knows-someone. Fortunately, it's not as hard as it sounds. Just ask every single potential trading partners you talk to (REI brokers, PMs, legal, etc) if they know which local banks are doing small commercial deals.

Hope that helps!

James Kojo

Edward Stephens · Answer

Thanks for the guidance.  Is there a place like Zillow for Realtors (but for commercial lenders) where I can see their reviews and judge their "reliability and certainty of execution"?

Edward Stephens · Answer

@James Kojo Thanks for the reply.  I appreciate that I might not be a big fish just yet, and a lot of lenders are really looking for someone who has larger deals and deeper pockets.  I’ll get there eventually! :)

How to interview commercial lenders?

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