Unfinished business

Too often in the commercial space, money is left on the table that doesn’t need to be. When commercial transactions don’t close, a great deal of time and effort goes into compiling (by the agent) and underwriting (by the lender) those commercial submissions, but ultimately one or both parties don’t see any revenues as a result of the efforts they’ve put in.

Here at The Financing Hub, we have a unique view of what’s going on in the commercial brokering space. As an industry-wide platform, we see hundreds of deals – large and small, covering almost every type of funding request you can imagine. As a result, we see what works and what doesn’t, including for those transactions that didn’t close.

For this article, I asked my team for an analysis of our past application flows, and also reached out to a number of our Financing Hub lender-users. Here’s what I found.

The big transactions
First, transactions over $10 million have good closing rates. Why is that? Put a lot of zeros behind any number and people get more serious. Typically, everyone puts more time and detail into creating $10 million-plus submissions. The broker plays much more of a direct advisor role – involved earlier in the project, working with the borrower on funding options and securing everything needed to get the application closed. At this level, there are clear, exclusive broker-advisor mandates. Larger commercial brokers just won’t work without those mandates in place.

We also found that there was limited deal shopping. It seems that finding an interested lender and then taking the time to work with them is the better answer for clients.

Our analysis showed that this increases the number of closings and generates more placement fees compared to spending the same amount of time and effort trying to find a lender who will do the transaction more quickly or with a better rate.

At this level, everyone involved is focused on doing what needs to get done to close the project so the client can start generating new revenues. Unfortunately, we see this important focus missing at other levels, which results in too many submissions becoming unfinished business.

The medium-sized transactions
Transactions between $3 million and $10 million don’t have the same closing ratio. Our analysis showed that the number-one reason for the lower closing ratio appears to be that too many agents are not getting exclusive broker mandates. The second culprit was excessive deal shopping, usually by agents without the proper mandate. When we reviewed the lender decline responses for this category, we found that many times, the lender had already seen the deal from one or more agents, but with no material changes made since the last decline.

A $3 million to $10 million mortgage is substantial. No lender is going to authorize a transaction of that size without a well structured, fully compiled submission. As a broker, you shouldn’t be putting in that level of effort without a clear mandate from the borrower, agreeing to work with you on an exclusive basis.

At the same time, we noticed that the borrowers at this level often fall into the category of knowing just enough to be dangerous. When the broker is called in, the borrower often already has a half-baked idea of what the financing presentation should include.

If there’s a niche that really cries out for professional broker-advisors, this is it. As a borrower, a broker who is simply going to shop or re-shop my application doesn’t warrant exclusivity or much of my time. However, a broker-advisor who is going to work with me and my team to find a viable solution that will secure my needed funding is absolutely worth my time. Be an advisor, but one with an exclusive mandate. Don’t waste your time with someone else’s unfinished business.

We recently did a webinar on how brokers can work with a borrower’s team. A key suggestion that came up was how to prove that you’re the professional financing advisor your borrower should be working with. If you’re interested, you’ll find one of our Hub Hints on that subject on our website, thefinancinghub.com.

The small transactions
No other level leaves more money on the table than transactions under $3 million. Believe it or not, abandonment is one of the primary reasons commercial transactions in this category don’t close. Most often, the brokers who abandon these files are those who primarily derive their income from residential business. When inexperience brings them up against a wall, they abandon their commercial deals and go back to their residential business.

Before you do that again, let’s do the math. On a $1.4 million commercial submission, the standard fee is $14,000 or more. For a $650,000 application, the fee is $6,500 or more. You’d have to achieve $2.8 million and $1.3 million, respectively, in residential mortgage placements to replace just one of those commercial transactions. Even if you just refer the application to another placement source, you as the originating agent still stand to receive $2,800 or $1,300 if your referring broker places the application. Please stop leaving all this money on the table.

Failing to do the upfront work is another key reason commercial brokers aren’t earning their fees. For a residential application, with four or five pieces of standard information, a broker can often get a strong indication of whether a lender will do the deal and what the rate range will be. Brokers often try this same approach with commercial lenders, only to get early declines.

Commercial needs all the work done upfront. You can’t wait to start the work once you have a soft commitment in hand. The same thorough application and document review you would do later might uncover key points ahead of time that can materially add to the submission.

Unfinished business isn’t good for you or your client. For you, closing fees are your livelihood. For your client, it means missing out on the longer-term revenues they might attract from the property.

No matter what size transaction you take on, get an exclusive mandate and be your borrower’s advisor, not their shopper. Always be closing-focused, finish more business and don’t leave any money on the table.

Paul McGill is president of The Financing Hub, which is dedicated to delivering effective digital solutions for commercial real estate financing.