An important and painful lesson learned by just about every new commercial mortgage broker is to always require a signed fee agreement from the borrower.
You’re going to learn this painful lesson eventually. The only real question is whether you learn this lesson after losing just five big commissions ($10,000+) or whether you have to lose fifteen big commissions before you learn this lesson.
You probably think that the purpose of the fee agreement is to protect you against the borrower refusing to pay your commission at the closing. This happens occasionally but not very often. By the time most commercial mortgage loans get ready to close, most borrowers are exhausted, impatient, and eager to close the deal. The borrower doesn’t want to risk starting the four-month application process all over again by appearing dishonorable in front of the lender.
The real reason you need a fee agreement is to protect yourself against (1) borrower fraud and (2) unjustified borrower cancellations.
Commercial mortgage borrowers lie all of the time. They lie about having the target property in contract. They lie about having the cash to make the down payment. They lie about the purchase price. On refinances, they tell tall tales about the value of their commercial property. They withhold material information about their past credit problems. They lie-lie-lie. If you have a fee agreement with them (a contract to arrange a commercial loan), you can sue them for lying to you.
You will also quickly learn that commercial mortgage borrowers have no appreciation for the value of your time. They will work you for hours and hours … and then cancel on you for no legally sufficient reason. Their attitude is, “Everybody knows that you don’t owe your mortgage broker a fee unless the deal closes.”
Excuse me, but these are not owner-occupied, one-to-four family loans with a personal, family, or household purpose. Commercial loans are not subject to Reg Z. There is no legal Right of Rescission. If you cancel a commercial mortgage loan, in many cases you will still owe your commercial mortgage broker his fee.
I got screwed out of my commission so many times as a commercial mortgage broker that I went to law school and became an attorney. Imagine going to law school with two children in diapers. I never missed a day of class. I briefed every case. I graduated with honors. I did all of this because I was tired of getting screwed out of my commission.
I never practiced law in the traditional sense, but over the next six years I proceeded to sue 30+ commercial mortgage borrowers who cheated my company and me. I won almost every case. These were not innocent consumers of whom I took advantage. These guys were filthy rich investors who thought they could get away with cheating a poor mortgage broker. Thirty times the court (more precisely the arbitrator) agreed that they had in fact cheated us.
I teach a separate Commercial Mortgage Broker Fee Collection course for just $199 that comes with a sample fee agreement. I strongly encourage you to take this course. It may prove to be the turning point in your career as a commercial mortgage broker.
Until then, here are some pointers:
- Always make sure that your fee agreement provides for arbitration under the Rules of the American Arbitration Association.
- Make sure your agreement provides that any hearing will be held in your own hometown, not in some state 1,000 miles away.
- Make sure your contract forbids the award of attorney’s fees.
- Make sure your contract has a non-circumvention clause.
- Your agreement does not have to be an exclusive agreement..