Obtaining a Commercial Mortgage: Broker vs DIY?

Question

We have a 16-unit multi-family in Central Connecticut under contract for just north of $500K and would like recommendations for obtaining a commercial mortgage. Should we shop the loan ourselves to portfolio lenders, or give it to a mortgage broker?

If the latter, is it appropriate to do a combination of the two if we have pre-existing relationships with lenders and disclose that to the broker?

Thanks in advance.

Joel Owens · Answer

A lender can't really give a definitive rate until they have underwritten the deal.

So calling around getting promised we can do this or that by banks or mortgage brokers is a waste of time. I would pay more attention to a banker or mortgage broker that says until XYZ happens I can't give you clarity on the rate. Until they go to lock that day the rate is floating. Banks and brokers are notorious for re-trading the rate. Sometimes that is the buyers fault for giving them misinformation or incomplete information to make a decision. Other times it is the mortgage broker over promising to get you committed to the process so once it re-trades and they can't give you this amazing rate you will close the loan anyways.

You are basically looking at a 400k loan or so. One point you are talking 4k fee and if they are not direct themselves and have to split it is 2k. Not really worth their time.

I have to pull favors to get my guys to work on 3 or 4 million loans. One of my commercial mortgage broker friends has 2 points on a 37 million loan. After splitting with his boss he is getting 370,000 for his share and it is closing next month. The larger loans are more specialty loans and so you can get better points on them sometimes.

400k is really a local bank or credit union looking at that deal. 400k might be a larger loan in residential but in commercial it's like a 30k house.

Just do not expect 100 lenders to be jumping all over you for a loan at this level. Arbor Funding in NY does a lot of multifamily.

Josef Torkelsen · Answer

On my deals, I generally have three routes going in parallel...  One with a mortgage broker, one with a small local bank, and one with a large nationwide bank. I am doing two deals now and in one deal, the broker won and in one, the local bank won. The key though is that the banks, especially with commercial loans, will keep lowering their deal and making it more attractive so never just go with one bank and always shop around.

Jared Rine · Answer

@Jonathan Makovsky...I think it depends.  Being a finance broker, I always want to say go with the broker because that's how I make a living, but it's not always the best option, especially if you have developed relationships.  I think I get approached because sometimes borrowers want to see what's out there as far as options, terms, etc., don't have the time or want to take the time because they have busy lives, don't necessarily know where to go, or are 'shopping' at the wrong places.

For example, I got approached from a client of mine for a large multifamily bridge loan ($7MM+).  This client has outstanding lender relationships with some of the largest firms around (some of which we also have a very good relationship with).  While these lenders are very good lenders in their space, this borrower has been approaching all the wrong lenders for their deal because it's not the right fit.  Square peg, square hole.

Out of respect for the broker, if you're going to shop on your own too, I would disclose who you're going to so they don't approach that lender (if they do have a relationship with them).

Even though I'm out of state, I would actually entertain taking a crack at your loan.  It's a small loan amount, which already takes a lot of lenders off the table.  If you don't find what you're looking for locally or with the relationships you do have, let me know.

Thanks,

Ashley Pimsner · Answer

Why don't you simply compare rates/programs of mortgage brokers to that of commercial lenders and pick best deal?

Rates are based on property's DCR and LTV so why not shop til you drop, it's not like they are pulling your credit.

Find out who broker is getting his rates from and approach them yourself and see if you can do better.

Mortgage brokers can offer better wholesale rates on residential side vs retail rates of banks/ lenders since the loans are securitized and sold to Fannie and Freddie.

Most commercial loans kept in banks portfolio and not sold, so in my humble opinion, it is better to deal with commercial lender directly.

Ashley Pimsner · Answer

@Jonathan Makovsky

In my experience you are better off shopping yourself vs a mortgage broker as most portfolio lenders do not work with brokers.

Here are a few questions to pose to potential portfolio lenders...

Do they have geographic restrictions?

Do they have net worth or liquidity minimums?

Do they require you to form a business entity like an LLC to which they will lend?

Is the loan a recourse or non-recourse loan?

Will the loan be reported to the credit bureaus?

What are typically amortizations 25-20 year terms?

What is minimum DCR usually 1.25?

What is max ARV/LTV usually around 70%?

Hope this points you in the right direction and good luck!

Give us a follow up post when you have secured the commercial loan and give us an idea of the requirements and terms so BP community can benefit.

Jonathan Makovsky · Answer

@Michael Anspach

We ended up going directly to a regional lender and it has worked out well (although I've made some very good brokerage connections in the past couple of years that might have worked as well).

Funny timing for you to ask though because we are in the process of refinancing out of the deal. We received an offer for nearly double what we bought it for, but are instead pulling out all of the capital we invested in (and then some) and are going with the BRRRR strategy.

Michael Anspach · Answer

@JonathanMakovsky can you share what did you end up getting?

Jonathan Makovsky · Answer

@Jared Rine thanks so much for the feedback and your experience from the other side of the table. Feel free to PM me to discuss specifics about the deal.

@Joel Owens thanks so much, and I love the advice on getting a feel if the bank will be re-trading by not saying until XYZ happens.

I think our loan would be pretty small for Arbor, but I can give them a call.

SIDE NOTE 1: Funny story, I worked on Arbor as an audit client when I was a CPA. Ivan K., (CEO} would come in every Friday asking our managing partner to play golf in the Hamptons at $1,000/hole. Our partner declined because of "independence" regulations, but I think he was just a lousy golfer.

SIDE NOTE 2: We know it's a small loan and almost too small of a deal for us. (Not that we're big shots, but 10+ caps after leverage and paying equity investors, there's not much absolute dollars leftover for us.) The deal feel into our lap with a seller that we worked with before and we're buying the units at a 20% discount ($40K/unit = market and we're paying $32K) so there's enough of a delta for us to make a go of it, even if we want to sell within a short period of time. We were also floating the idea of getting a private investor to fund it at a higher interest with no/low pre-payment penalty in the event we want to sell within a year.

My few reasons to hold onto this is: 1) Get the experience of being a multi-family investor 2) Credibility in the mulit-family space [despite the relatively small size], and 3) Possibly try to scale up to 100+ units within 18 months.

Jonathan Makovsky · Answer

Thanks @Josef Torkelsen .

@Ashley Pimsner , thanks again for your responses. The reason I wasn't looking to go both routes is I don't want to unnecessarily spin brokers' wheels if we're both going straight to the horse's mouth (unless the broker can get better rates).

Jonathan Makovsky · Answer

Thanks so much for the feedback @Ashley Pimsner .

What [brokers] have told me is that they can often get significantly better rates that almost pay for itself to use a broker, aside from the time savings? Is that more of a sales pitch, or true in specific cases (ex. larger deals)?

Obtaining a Commercial Mortgage: Broker vs DIY?

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