Loan Officer Consultant

Many times a borrower or broker says they can not go Full Doc and must go Stated. This is not necessary most of the time. A lender can roll the loss from the taxes back into the loan to show the profit. Losses such as traveling expenses and car payments can be added back into as profit, as well as one time charges like a new roof. (and there are many more examples) Structuring this as a Full Doc loan will result in a stronger deal, better rate, and better terms. Knowing how to structure this part of the deal and getting the tax returns will keep you competitive against your experienced competition who would know how to structure the deal and go full doc.

When you ask the borrower for the tax returns and they immediately respond negatively, this is your shot to show why you are an expert. At this time educate the borrower about adding back in losses, this will create value in your word and ultimately trust. Explain to them it doesn’t hurt their chances to get a loan, it actually does the opposite and improves the chances. Let the borrower know showing taxes only gives you and a Lender a full picture of all options and avenues. If you get the taxes and are not sure how to determine let the Lender make the decision if the loan needs to be Stated or not. During a purchase the borrower doesn’t always need to have income that will support the property the property should support itself. Your borrower doesn’t need to be $1 Million liquid to buy a property or have the best taxes ever. A Lender will care about the income the property is making, not what the borrower makes before owning this property. * Currently in the Market Stated is getting more and more difficult to close with most Lenders anyway. So knowing what to do is key. Investor Stated is not happening anywhere from what I see, and this will remain until Lenders start getting aggressive again.

I read and hear scenario’s all the time stating that the property IS cash flowing, just to discover after getting together all the correct docs that its not at all. You can’t take anyones word for it. The realtor, seller, buyer…nobody, the Lender won’t do it and nor should you. Knowing if the property truly cash flows helps determine what type and which Lender to go to. Many times you are told the property cash flows but someone has forgotten to figure this in with the new mortgage payment that is being sought. This is a good quick measurement. The main items you need to see true cash flow is a rent roll, a recent P&L. These will show the expenses and money made. Once these are all figured in an equation you can get the DSCR ( cash flow ) of the property. Many lenders require this number to be at a specific ratio to even do the loan at all. So getting these docs should be your first priority. You may have a loan that nobody can fund because the cash flow is so bad. These docs are what you want to get to help yourself weed in and out the would be and should be Commercial deals on your desk. Keep in mind not all deals are doable, especially in Commercial. If a property doesn’t cash flow there is nothing you can do. Q * You may be thinking “Can’t the owner just “fix” the P&L/Rent Roll to show less expenses?” A - The Owner can do that, but the P&L & Rent Roll is also recorded in the borrowers tax returns by a CPA. Also as an appraiser reviews comps they will see market rents in the area. The appraiser will see through recorded docs what a property similar to the one you are working on has as rents and Losses. So there is no real loop hole here.

What is Factoring? Factoring is loaning money to a company against their accounts receivables. Company’s that are not financially strong or just are in a Cash Crunch. What is reviewed? The borrowers PFS, Equity in company, cash flow, how high leveraged he is, the debt to cash flow ratio, Monthly sells, What type of product do the sell and who to and Amount of receivables outstanding. They are looking at the customer and how strong that money coming in is. If the customer is credit worthy, and is their an income trail of money coming in from the client. In other words do they have some good contracts that pay them consistently. When is factoring the option? A. Many times a company may pick up a new account or increase production to an account. They will need to get cash to pay for the needed inventory, payroll, supplies, etc… Many company’s hurt during payroll time, because they are not paid by their clients for 30days+ Factoring can help the business owner get paid for these contracts before the payment date. B. Business owners turn to their bank turn for credit lines. If these These clients are turned down from the bank due to low net worth or taxes showing a large loss for example. In this case Factoring Is good option. The bank will not look at the current contracts or new contracts made, but Factoring Companies will. C. Maybe the borrower has an existing credit line with the bank can not go high enough. Factoring can pay off that line and add to it. D. Also if the borrower has a credit line with their supplier but they will not increase their line because they have not been in business long enough. *Great idea for the client: Factoring cost 2% and if they client gets a 2% discount for paying early then factoring pays for itself. They would be borrowing money for free. If they negotiate well they can get a 3% discount and make 1% using the factoring company. E. (This is my favorite) If you have a Commercial borrower looking to refi their business to get cash out, and are denied because the property is not able to be refinanced. Factoring becomes an awesome option. *Another plus in factoring is pay out to you. Most factoring Lenders will pay a monthly fee ( like a Maint. fee or Activity fee ) to you as long as the client continues to use their services. Many times a company will continue this service for a long period of time because spending 10% or so is worth getting their money early. At the end of the year they add this to the loss column and write it off. A Good Example of the above.I have a client that is a tile company. They just landed a big contract with a major Nationwide chain that will be selling their tile. The downside is that immediately they need to stock up on all of this tile that that will be for sell. This is a huge order. But when the new contract comes calling they can’t say ok, I’ll order it and expect it in 30 days. Their product needs to be available then and there. So that means to stock up on this they will need to come out of pocket and wait for the Tile to be sold and then they need to wait to be paid. This can put a major hault on cash flow for other projects, jobs, and or daily operation. As you can already tell Factoring was perfect. Once the first order was in my Purchase order contract or Factoring facility was ready to go and in play. Now they will not have to wait for the 30-60 day payment I can supply them with cash now. As this company grows, and their business grows, as does the orders and my check back from the facility I put in place.

I speak with a lot of Brokers who are new to Commercial, and they have 100 questions for me when about to meet a client. They are unsure what to ask for and just know that the borrower will see right through them and they’ll lose the deal. The Key here is to center the conversation around Questions to the borrower. Questions will not only control the conversation but they will also make you look like a Very Experienced Commercial Advisor. If you don’t know what questions to ask start by pulling out your trusty 1003. Get this application filled out 100% complete. Not only is that a lot of questions :), but thats a lot of good info. You can also add some questions of your own, property type, what is the goal of the property?, Term desired?, ask about the current mortgage and what they do not like about it. Ask who the competition is and what they are offering. If you do not have a good Commercial checklist of needs just ask for what you would in a Full Doc residential loan to start. After this first meeting and Q&A you will have enough info to give to a Lender or your Commercial go to guy. These Answers and info will lead into the follow up and next group of docs and needs list. Its not all about faking it, because this is really part of it. Its just getting you to step 2 or 3 will require practice and experience. As you see more and more deals you will start to learn the basics to ask for per property type, and per deal. Since there is no Commercial deal ever the same, your needs list will remain tweaked and ever changing. This is the fun part of commercial that keeps this side of finance not monotonous.

This question is even more ridiculous than in Residential.There are so many factors in figuring a rate in Commercial: Property TYPE, LTV, the credit grade, DSCR, location, Term and Amortization to name a few. A Rate is not what closes a deal anyway. You may have a super low rate, but what is the term and Amortization? A lower rate with a 25yr Am vs a 30yr Am is not a lower payment. So quoting a rate is actually doing a dis-service to the borrower and yourself. Until you have a majority of docs or experience in Commercial loans you can’t really quote anything. At the most you always quote a range. The borrower is asking you so they can shop you in your mind anyway. So give them some comfort and honesty and in the same breath take their mind off of rate. I was taught this by a friend. You control the conversation with questions. Therefore you take the borrower out of the “Rate thinking” by asking questions. “Is rate your most important item with this loan?” Wait and Listen. The borrower will now start to talk about other concerns. 9 out 0f 10 times these “other concerns” or needs are the keys to closing the deal… not rate. I am positive that the RATE is not the most important thing for a client. You must dig deeper into the clients needs. I had a office refi that the borrower was shopping me on. He had a good rate with another Broker/Lender, and it was actually better than what I offered him. Except that my deal had a longer fixed period and thats what the Owner really needed. Even though my rate was a bit higher I had found his true need and closed the deal. You must do the same with your borrower. Ask qualifying questions, they will give you the answer you need.

Q: At what time in the transaction do I use it, and Why?

Over the last 2 weeks this has been an ongoing question from other brokers, or I have heard the horror stories of the fee agreement not being put in place. As the market in Commercial continues to grow and Brokers looking to expand their financing repertoire. They find themselves dealing more and more with savvy clients, and other brokers. Which a lot of times is a far cry from the residential world. With the Respa laws not in effect, and the Commercial learning curve so great Brokers are getting burnt on deals left and right. You must learn to protect yourself. But how, and at which Point?

One Common mistake of the Fee Agreement is discussing this to early in a transaction. If you have not given a borrower a Term Sheet/LOI then you are doing this step prematurely, especially if you have not collected all needed docs to run a true analysis of the deal. You will typically shoot yourself in the foot and take the borrower or brokers mind off of the loan and more on the fees of the loan. At the end of the day your competition now has leverage because you have the client focused on fees not the true #1 issue the actual loan. As the borrower talks to potential brokers/Lenders their first question is “what fee do you charge?” AVOID THIS MISTAKE and give the fee sheet at the opportune time.

TIMING IS EVERY THING: When a Lender gets you back a term sheet you need to copy down the important data. Rates, terms, features, address, loan amount and monthly payment to name a few. In this sort of list or table you will also have Lender Fees if any and your fees. Just like a GFE your fees are not singled out or become the object of the loan. Commercial Borrowers know they have to pay for service. You just have to approach them at the right time for this part of the transaction. You should have a blank Fee Agreement ready where you just fill in specifics of the loan. Once your Fee Agreement/Term Sheet is signed you immediately give them the Lenders copy and have that executed as well. You present the Lender back their form and many times they will ask for yours as well upon acceptance of the LOI/Term Sheet.

If you do not use a Fee Agreement or work with a broker that is, you have no insurance or contract for service to protect you. The borrower can continue their loan with the Lender at the Lender can be promising to pay you this or that. But once that loan closes the call backs may stop from your borrower. Or because you did not hammer out your worth when presenting the loan, the borrower pays you what can be negotiated after the fact, the moment, and climax of the loan. The newness, and your hard work has worn off in their minds.

Once this fee agreement is signed you are protected along with your NCND and should feel quite confident in scrutinizing your fee and the loan.

I often hear a broker complain that they have had a deal on their desk for months, and need to close them. Many reasons this happens is the Broker is not educated on commercial in where to go, how to structure, and even what info to ask for from the borrower. These Brokers work in bits and pieces and waste their time, and the clients time if this deal is not even a closeable deal. If you can look at this deal and get the borrower back answers fast it reduces the pressure on you as the broker. If the deal is not doable, you have saved yourself time. You even created value in your services if you educate the borrower on why the deal will not work, and then offer structure changes that will make the deal close.

Another key that I will touch on in another message is speed. Not just for the above reasons but because you are being shopped.  If this deal is a good deal you want to bang out a term sheet as fast as possible to keep this deal in your hands. If you are asked about rate without docs a Broker or Lender will not be able to give a real rate. Usually just a range and say “it depends”. Get loan summary filled out and ask questions so that you look like the consultant and create value.

There are many docs needed to review in a deal. A borrower and seller are always slow at getting what is needed. The key to getting these docs is confidence and firmness. You need to start the urgency with the borrower to get docs to you in a reasonable amount of time. More than likely there is a contract already in place which means that you are in a time crunch from Day 1. These borrowers have contracts that they will lose their hefty deposit on a deal if the financing is not in place. Without the needed docs to review the files strengths and weaknesses you can’t help yourself or the borrower. Explain the importance and demand the docs fast. You know how borrowers are at getting items needed, at being lazy, and slow. As you create value in yourself they will trust you, and know you are asking for this because it is needed. They should want you to evaluate their deal as a consultant on their side. Reviewing key evidence that points towards the Return on investment opportunity or whatever the borrowers goal may be.

You need to acquire these docs and crunch numbers to see if it’s a doable deal. The Key is to be firm and confident that “This is what I NEED.” Set a date they need to have these docs to you. If they need to call CPA ask if you can call the CPA. If they complain about forms, ask “Well you want 7 Million dollars don’t you?” You must be quick, because there is a hiccup somewhere and/or they do not like their rate and terms and you have to negotiate. Get the needed docs together, send in a complete package for this deal type to the bank. Get the letter of interest from bank put together a term sheet from letter of interest ( LOI ) and have your client sign it.

Its best to use a PQ form based on each deal type to help explain the deal to you and your UW. When rate comes in to play DON’T sell rate.  Sell payments, solutions, features of the loan and amortizations. Explain the payment to the borrower. A 30yr Am will have a lower the payment than what they may of been quoted by someone else. Go over Return on investment this is the best way to show your deal is better. Look at the deal as a whole. Your deal vs the competition and dissect each part from out of pocket due diligence, down payment, monthly payment, PPP, fixed term, and ROI with monthly and yearly. If you have done the best possible and are educated on where to go and structure you should already have the upper hand. Give the borrower 1 weeks time to accept the term sheet. If they do not come back in a week they are going to go to slow and shop more and more, and they are not interested. Move on. Note 9 out of 10 Commercial deals will not work, with you or anyone.

Step 1 in getting deals is marketing. Begin to let past clients, current borrowers in pipeline, and friends know you are doing Commercial loans. Let all your marketing materials and answering machine messages show you are doing commercial. Your secretary can mention not to forget to run any Commercial scenario’s by you.

Step 2 is PQ and ScreenFigure DSCR and look for any weaknesses in the deal.Tweak these issues or structure the deal to take to a Lender that allows these type of problems.*Think in time frames. Create urgency, with Lender and borrower. This will help get docs needed fast and info needed from Lender fast because they were already under contract. Remember you must think in speed, and urgency.You must also go fast because the borrower will have less time to shop, and a *contract is in place if a it’s Purchase. Have a NCND form signed to protect you from the borrower going around you.

Step 3 get a Term sheet kicked out to the client:Lock in your borrower with an agreement for financial services or term sheet. A Term sheet is better. A Term sheet should have 7 day expiration. This agreement says we are done shopping and you have a 90 days exclusivity. When you issue the term sheet them through the terms. Put the payment on the loan and walk them through the strengths and benefits. Call every 2 days till day before term sheet is expired being signed.