How Do You Vet JV Partners or Financier Brokers?

Question

I set up a call between one of my developer friends and a BP member today and it quickly became clear that there was a chicken and egg problem.  The BP member and loan/equity broker was trying to vet us and get us to fill out loads of paperwork to circulate to her investor groups for a deal we are working on in Houston.  We were trying to get her to supply us with information to decide whether or not it was worth the time to fill out loads of paperwork and supply some unknown person a lot of personal information.

How do you normally get past the loads of paperwork chicken and egg issue so as not to waste each other's time?  Does the person normally need to be recommended or supply some references to qualify for your time?  I am just wondering what other people do so that I may be able to employ best practices going forward to maximize the use of my time and to avoid spinning my wheels with people that can't help with financing.

Vikram C. · Answer

Maybe I am wrong, but I have always assumed that someone who says he has an "investor group" or is "one step away" from the end investor or buyer is just going to waste everyone's time.

Darryl Dahlen · Answer

Not fun is it? There SO many flakes out there, and unfortunately, no sector is immune from them.

My plight is with borrowers who are so out of touch with reality it makes me wonder how they were ever successful. I had someone approach me recently for a commercial loan after being turned down by his bank. He was turned down because he stopped making payments on his loan. He thought since he was refinancing his property he didn't need to make any more payments until he closed on the new loan. I about fell out of my chair.

Borrowers have to deal with shady brokers, lenders who are cherry picking deals, banks who aren't lending at all but won't turn the deal down until months later, and on and on it goes.

I know it isn't easy to sort through the lending minefield. Looking for reputable equity and JV firms is even harder since they tend to operate more under the radar then hard money and conventional lenders do.

I wish I could help you, but I don't have much depth in that category myself. The few I do have are very niche specific, and to be honest, they have all the business they can handle so it really isn't the best use of my time to make deals work that need a JV or equity component.

Personally, since finding, and then successfully soliciting these groups, is so challenging right now I believe it is almost easier to strengthen the deal internally by bringing on an another partner and/or scale down the project to where it works conventionally or perhaps with a mezz component instead of an equity/JV structure.

Bryan Hancock · Answer

The project is in Houston, not DFW.

@Darryl
I agree that the lender should vet the borrower as well.  What I don't agree with is that the borrower should jump through 100 document hoops to qualify for 15 minutes on the phone with the potential financier (the guys or guys that write the check...not the broker).  If the borrower can point to a website with 30+ years of successful projects and send a soft POF that should go a long way toward showing some of their cards.  The borrower should then be able to vet the broker by speaking to some of his/her references to see whether or not they can do what they say they can do...no?

I understand the, "Coming to me" argument from a strictly myopic point of view, but the broker should also consider the plight of the money seeker.  There are, as you mentioned, a ton of scam artists out there trying to suck out up front fees and providing no tangible value.  There are also a ton of people brokering equity from potentially unscrupulous (enter Tony Soprano) sources.  What we need are often JV partners because of the nature of our projects.

Absent a referral I don't know what the best method is to separate the hucksters from the real folks.  That is part of the reason I read through some of the posts on BP about getting an approved vendor list going.  I recognize this may be a liability center for the site, but it would really add value from a poster and investor perspective.

It seems that everyone distrusts everyone else right now and that is a big part of the reason why our economy is sputtering.  A lack of trust breeds doing nothing, which is bad for the economy overall.

Bill Gulley · Answer

Bryan, Dallas/Ft.Worth is a pretty good size area and I'm sure there is plenty of local money there. IMO, you'll always get better financing with a lender that can reach out and touch the collateral. Speaking as a past broker/lender, it's just as important to have qualifty borrowers in your portfolio as having money to lend, one without the other is not a business. Not to make life difficult for those attempting to do business over the internet or nationally, but having a few good local lenders/brokers will be the key to your business in real estate.

Darryl makes some very good points and many of the concerns he has pointed out can be eliminated by dealing with those you can do a little due diligence on, locals will have a reputation, a little leg work and you'll get to know who can perform and who use to sell cars last month! Good luck, Bill

Darryl Dahlen · Answer

Bryan, yours is a tough spot to be in, but let me share with you my experience and you can take from it what you will.

As a commercial broker, I can tell you what some of the problem I run into on a regular basis.

1.There are also a lot of borrowers who have been burned by fee grabbers, and as a result, have dug their heels in by being unrealistic about how the loan process works. This often means the borrower expects all fees to be paid at closing which is simply not going to happen. This thinking can lead to a lot of false starts so its important that I take a temperature reading on the borrower as well as vet the project.

2. There are a lot of broken projects out there. The project can suffer from a poor market, broke developer, too high of an LTC due to falling values, expired permits, on and on. I need to see the current numbers to see if the loan request is reasonable and that the relevant information supports the loan.

3. There is a LOT of fraud out there. People are forging financial statements, money spent on the project, etc. I don't take any one's word on anything relating to finances. They have to prove to me they are real and financially capable of closing a deal. It doesn't matter how good a loan looks if the borrower can't afford to draw permits or pay for closing costs.

I could go on, but I think the point is clear. As a broker, I need to vet the client to make sure the project is real and is above water. With lenders being more selective than ever it is critically important to maintain my relationship with them and not waste their time.

There is more to a project than an executive summary, but typically, that is the first doc that is provided. If the summary looks good, I then require YTD financial statements, budgets, resume(s), appraisal, etc.This helps me to make an informed decision as to if the project still has legs, or is a pipe-dream.

From the developers end, all of the requested information should be on hand, so it should be no big deal to provide it when requested. If I were a borrower, I would take solace in the fact someone wanted to see it so they are well informed about my project.

As far as vetting goes. I think it's pretty easy to determine if you are working with someone who knows what they're talking about. I can tell within a few minutes if I'm dealing with someone who is realistic about lending in 2010 or if they're stuck in 2006 and are looking for the impossible. I would like to think a perspective borrower could tell if I have 8 years experience and actually have real lenders behind me versus if I'm some used car salesman trying to make a quick buck.

While I have references, I don't pass them out to just anyone. I want to know that I'm not dealing with a tire kicker, shopper, or an unrealistic borrower. If they pass the sniff test, I am more than happy to appease any concerns they may have about me, but they have to prove themselves to me first. After all, they came to me (in most cases).

So, I think it is important for any borrower to have up to date docs on hand as most real brokers will require it. You didn't state if your developer friends has a good executive summary on hand, but if they don't, then they are putting the cart before the horse and need to spend some time putting one together.

Hopefully, this post gives you some insight into the mind of a broker. Again, take from it what you will as everyone does things differently.

Bryan Hancock · Answer

Not only that...you have to deal with banks' underwriters changing their minds after pinging you for documentation forever.

Darryl Dahlen · Answer

Indeed, but it is far easier for me to vet a borrower then for you to find a funding source. I'm dealing directly with the person I need to  and with proper questions/docs, I can make an informed decision very quickly as to if I want to proceed.

You have fight your way past the gatekeeper (broker), and if you make it through them, you then need to get comfortable with the lender. That would drive me nuts.

Bryan Hancock · Answer

Thanks guys...the project that sparked this has come and gone.  This is more of a general observation and rant on my part.  It seems Darryl and I have similar problems with vetting people for a good fit.

Justin Herrema · Answer

Bryan, How big is the loan? If over 20 million and good collateral behind it I may have an option.

Unfortunately banks are not lending anywhere regardless of credit, net worth and cash flow. 
The best way I have found for JV is simply word of mouth. Jumping through a bunch of hoops though is something I wouldn't do unless you knew there was a serious interest level.

Bryan Hancock · Answer

Any new thoughts on this?  I think I am better at sorting through the rif-raff quickly now, but I still waste a bunch of time on the phone with cold leads.

How Do You Vet JV Partners or Financier Brokers?

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