Don’t Buy into the Hype – Beware of the “Yes” Originator
With a strong commercial real estate market nationwide, many originators are under increased pressure to say “yes” to financing terms and conditions that they would shy away from in a less competitive lending environment.
“I don’t see the frenzy dying down anytime soon, with at least one to two more years of fairly intense competition,” says Tim Madigan, a commercial loan originator for Alliant Credit Union. With more than 15 years of experience as an underwriter before moving to loan originations, Madigan has first-hand knowledge of the commercial real estate lending market, as well as its fluctuations.
“At Alliant, we’re doing our best to maintain discipline, but we are seeing a lot of aggressive terms, which I’m afraid will have unintended consequences for borrowers who jump at the shiniest offer,” Madigan says. “For example, borrowers may get re-traded, which means the financial package’s initial terms may change after the originator’s due diligence, resulting in borrowers getting burned if they’ve already committed to a transaction based on the initial financing terms.”
Watch Out for Terms/Pricing Outliers
Terms and pricing for any given financing package should be fairly similar – or at least within a range – for the property type, location and market strength. “If you receive a financing package with conditions outside other offerings, you may want to pause,” Madigan warns.
Financial institutions have baseline ranges for terms and pricing based on market conditions, product type and the strength of the market. For example, right now Alliant is able to close multifamily financing with 10-year money at 180 basis points over the 10-year Treasury. Alliant can offer non-recourse loans at 65 percent loan-to-value with a 30-year amortization and an interest-only period based on leverage and the strength of the request.
Madigan advises to ask hard questions of the originator if you’re offered a dream package. What are the terms and conditions, and how do they interact with each other? What are the prepayment penalties? Is there any flexibility to renegotiate terms and conditions?
Also, ask hard questions internally. Does having an easy prepayment option in place outweigh other terms? Is it important to you that the loan will be held by the lender in its portfolio, as opposed to being sold and serviced by new third parties? In another scenario, a lender might offer a spread of 155 with no flexibility to prepay the loan or request additional proceeds during the loan term. Alliant offers open prepayment during the loan term with a step-down penalty of 3-2-1. Madigan explains that for some borrowers, having this prepayment flexibility may outweigh a higher premium on the rate, and Alliant has been very successful with this program.
Avoid Over-Exuberant Originators
Seek out experienced, professional originators who are up front and will respond honestly – good or bad – to your questions.
“It is beneficial for an originator to have a background in underwriting,” Madigan says. “Sometimes originators function more as salespeople than as bankers, but there is value in working with an originator who has meaningful experience in the mud and grit of underwriting loans.”
Originators with a sales mentality often promise the world without the follow through. Telling people what they want to hear isn’t good business and usually ends in negative experiences for borrowers and brokers, notes Madigan.
What to Look For in an Originator
“If it seems too good to be true, it probably is,” Madigan says. “Don’t follow your knee-jerk reaction and sign the ‘best’ deal without true consideration of all terms. Find professionals with experience and market insight to guide you.”
Find a lender that focuses on certainty of execution. You want to work with a financing team where all of the decision-makers are involved from initial financing request to closing. Your originator should offer feedback from those decision-makers quickly. And the originator should be able to help you understand the terms and conditions offered, and how that will play out over the life of the loan.
— By Amy Bigley Works, staff writer. This article was written in conjunction with Alliant Credit Union, a content partner of REBusinessOnline.