Unfortunately the closing rate for commercial mortgage loans is very, very low - seldom higher than about 30%. As a result, commercial mortgage brokers need to always maintain a pipeline of at least 15 to 18 loans.
Why is the closing rate for commercial loans so low? Home loans are largely underwritten according to a cookie-cutter formula. If the property appraises for enough money, if the borrower's budget is above water, and if the borrower's credit score surpasses the lender's minimum credit score requirement, the deal gets approved.
In contrast, commercial loans are individually underwritten in a very subjective manner by a portfolio lender, who will keep the loan its portfolio for the entire term of the loan. Does the lender like this kind of property, or did the lender recently suffer a loss on a similar self storage project? Does the lender like the area? Does the lender like the tenant(s)? As I have often told my wife, the world has never stopped inventing new and uinque reasons to turn down a commercial loan.
As a result, in order to close two to three commercial loans per month, commercial mortgage brokers need to maintain at least 15 to 18 commercial loans in their pipeline at all times.
This reality leads to a number of conclusions:
- A commercial mortgage broker cannot afford to devote too much time on any one commercial loan.
- Commercial mortgage brokers cannot afford to spend hours and hours preparing a commercial loan package. Instead, they need to develop a simple, well-organized, and easily understood commercial loan package that they can crank out in less than 45 minutes.
- Until your commercial mortgage borrower signs a fee agreement, make the borrower do the bulk of the heavy lifting, like fetching all of documents you will need in your package.
- Only after the borrower signs your fee agreement do you roll up your sleeves and spend hours preparing the package and placing the loan.
- In the meantime, while the borrower is fetching documents, work on other deals and on your marketing. Keep movng along.