NOTE: This article was originally published in 2017. In light of the ongoing pandemic that has caused massive economic upheaval, its relevance is even more important today. If you are serious about investing in commercial real estate, please take heed.
There’s a fundamental shift taking place in the American mindset.
What used to be taken for granted is no longer being held valid. Americans, in particular, are waking up to a new reality that if it is meant to be, it is up to me. In other words, we are coming of age and stepping into a greater reality where each of us takes responsibility for creating the future we collectively want to share.
The “old paradigm” of what I call “Entitlement” is being thrown out the window. What I mean by this is that more and more people are realizing that they can’t rely on government or other institutions to solve their financial problems for them – they are going to have to figure out a way to make their lives work on their own. They are going to have to look outside of themselves for answers. As Fox Mulder used to say, “The truth is out there.”
The old way
As a mortgage broker, I am approached every day with borrowers who have a deal that “has to be” funded a certain way, or by a certain deadline. When a borrower tells me what they “need” I immediately experience the desire to push back.
What the borrower is actually telling me is that they have a negative outlook, a poverty mentality and rigid thinking. They are focusing on what they don’t want, looking at their immediate lack and fixed on a single path to success. In other words, they are not in a state of resourcefulness. They are focused on their NEED and not on what Lenders want.
What Lenders Want
Just to be clear, what lenders want is to invest their money in a project that will provide a reliable return (aka loan payment) and a return of principal at the agreed-upon time.
This does not mean that lenders automatically say “no” to borrowers. Quite the contrary, as lenders review deals, they are usually looking for a way to say, “yes.” However, when a lender hears a borrower say that they NEED a certain thing – like an absolute guarantee of funding before the file has been underwritten, or 100% financing in the form of a first AND second mortgage, or to have all underwriting fees rolled into the closing, they will immediately say “no.” That’s not the way it works.
In order to get to “yes” the lender and the borrower must be in fundamental agreement with each other AND the economics of the proposed transaction have to work for both parties – in other words, the project has to be able to afford the proposed loan and terms, and the lender has to be satisfied with the proposed return on investment. If both parties are satisfied, there is a “win-win.”
How do we get to this successful outcome?
The process is called underwriting. In addition to being a process of inquiry and discovery for the lender (and sometimes also for the borrower,) it is a period of trust building. In order to build trust, the first step is to make small agreements and keep them.
If an agreement cannot be kept, then the party breaking the agreement has the immediate responsibility to inform the other party and renegotiate the agreement. This applies to delivering documents (on both sides,) attending meetings, transmitting fees upon request, and delivering a product (meaning both the collateral and the loan documents) that measures up to the initial proposal.
When a borrower insists on having the loan done his or her way, they are showing a lack of willingness to trust the other party to support their desired outcome. Keep in mind that the desired outcome is not the particular financing that the borrower might have had in mind — it is the completion of the borrower’s project and the return of principal to the lender.
A flexible mindset results in a successful outcome.
Flexibility requires strength, but more importantly it requires focus on the desired outcome. As one slowly stretches, new possibilities previously unobtainable begin to appear. Many times I have seen the outcome of successful commercial mortgage funding result in a specific set of parameters that neither party had identified at the start; however both parties were completely satisfied with the result.
* * *
2021 Update: we are currently working with a number of borrowers with different needs. One is 10 months in default on their current loan, although they keep making payments to their current lender. They have turned down a number of offers to refinance as “not good enough.” Another is in a tight, sticky financial situation due to COVID. Their original plan to refinance went out the window last year. Based on feedback from lenders, they have now shifted their strategy to a different type of solution and are pressing forward. Which one do you think will have greater success?
Sofia Capital Ventures is your Concierge for Private Commercial Lending. By applying our expertise to your specific financing, we can both advise you as to the best debt and/or equity structure for your deal and match you with the best private commercial lender for your project. There is never a fee for our Loan Evaluation and we provide written feedback based on our initial intake. Contact us today to get started.