A lender's insight into brokerage process

Real Estate Weekly, March 22, 1995 by Richard Wald

A realtor or mortgage broker should evaluate a request for mortgage financing on income-producing property through the eyes of the lender he or she thinks is best positioned and most likely, due to prior origination history, to fund the loan. If the broker asks a potential borrower questions that the lender will undoubtedly want answered, the lender will be better able to proffer a meaningful quote - one with a dollar amount, rate and terms that it will stand by.

A realtor or mortgage broker should also work with a borrower so the application submitted is properly documented and tells a story - who the borrower is, why the building adequately secures the loan, and whether the transaction makes sense for borrower and lender. Hard work and inquiry at the front-end of a loan transaction will streamline and add certainty to a process that by its nature is fraught with delay and misunderstanding.

Each lender emphasizes different criteria in underwriting real estate loans. At Emigrant Funding Corporation, we rely on the brokers and realtors with whom we have relationships to understand what factors we consider most important. Real estate professionals submitting loans to EFC should be prepared to satisfy what we call "the three knows": know thy borrower, know thy building, and know thy transaction. These "three knows" serve as a rough guide to getting a "yes," a loan that is approved quickly, with rates and terms that are consistent with what was initially qouted by the lender.

Know Thy Borrower

From the lender's standpoint, perhaps nothing is more important than developing a comprehensive understanding of who the borrower is. The broker, among other questions, must ask what is the borrower's background, experience, credit history, reputation and income? It stands to reason, for example, that an applicant who owns or manages similar types of buildings, especially in the same area as the property for which a loan is requested and has a good payment history on his or her other mortgages, is more likely to produce a stable return on investment and meet monthly mortgage obligations than an applicant with no experience at all. It also stands to reason that a borrower with credit issues must be able to supply explanations that do not defy logic. In short, the broker must help develop a profile that demonstrates this borrower can successfully operate this building (or has done so in the past) and thus meet debt service requirements.

Know Thy Building

One of the biggest stumbling blocks in the financing process is when the realtor or mortgage broker is unversed with the real estate. A broker's unfamiliarity with a property serves to waste the time of lender and borrower alike. In addition to reviewing the building's annual income and expenses and providing the lender with an idea of going prices for similarly situated properties, it is useful for the broker to actually view the premises and "get a feel for" the building, street and neighborhood. After all, how can a realtor or broker - or any sales professional for that matter - sell a product he or she has never even seen or touched?

The broker should also review the rent roll to ensure that it is consistent with executed leases and DHCR's paperwork. The lender will do this anyway, and in many cases will undertake a Coles search to identify the current tenants in the building (Coles is an on-line service which reports every tenant with a listed telephone number). If the lender finds variances between the tenants listed in the rent roll and those reported by Coles or to DHCR, the broker or realtor should help us determine whether these differences are material or can be attributed to normal vacancies and turnovers.

Finally, the lender will conduct a physical inspection of the premises. The broker or realtor may be a useful attendant on-site to explain issues concerning the building's physical integrity or supply answers to questions that may arise during the review.

Know Thy Transaction

The broker's or realtor's next step is determining the right loan product for the applicant. While a borrower may think he or she is better off with short-term financing, the yield curve and other considerations may call for intermediate or long-term financing. A flat yield curve certainly justi-ties thinking seriously about securing long-term financing, even if it could mean the borrower must accept a shorter amortization schedule. The broker and realtor must help the borrower think through whether too much debt, too long an amortization schedule, or too short a term is being sought, or whether renewal options should be considered.

Real estate is an emotional business. Borrowers may be seduced by the belief that there is some guarantee that owning income-producing property will steady returns on an investment while ignoring the speculative side of the venture. The best brokers act with the long-term interests of the borrower in mind and offer advice which fully describes the risks which attend a transaction.