Once you step into the Multifamily investing world you start to realize it is a small world. There are a lot of players, but you find out who is in the game quick. If you have not met them in person, you likely know of them by their online presence.
The world of commercial real estate finance is even smaller. The commercial debt brokers know the lenders regularly closing deals and they know the competition. But every once and a while you get a new lender that pops up that may offer attractive financing.
I call choosing that option as taking a flyer. If it is a lender that you do not regularly close with you do not know if they can perform.
Know the Market
If a buyer does not understand what the market is currently offering, then it is best to contact a debt broker to get the latest information. The lending market has been constantly evolving the last 6 months.
No surprise, rising interest rates are the culprit. Sometimes buyers will think they can get a rate that is no longer available. If we send out a debt request to 30 lenders and they all come back at 6%, then someone offering 5% is likely too good to be true.
You may be setting yourself up to get retraded or have your loan dropped once that lender finds out they are not in the money.
For some reason some buyers like to see extra proceeds or 50 basis points lower than where the market is at. And some brokers like to lure them in with that with unrealistic term sheets.
I would challenge buyers to underwrite conservatively like they advertise and not underwrite to a flyer. Go with a lender that closes deals regularly in your market and has a good relationship with the debt broker.
Multiple Brokers
Some buyers think that having 4 or 5 debt brokers shop the same deal will give them the best deal. When this happens, it is always a bit awkward because the brokers are going to the same lenders for the most part. The commercial finance world is small.
I have gotten calls from lenders who have told me which brokers are also working the deal. I have also even got a loan application with another broker’s name on it. I do not think that looks good on buyers inside the broker community.
The buyer likely burned 3 brokers during that transaction and might have taken a flyer while fishing for the best possible loan on the market.
I think it is best to work with one broker that you know, like and trust. Otherwise, all the brokers are likely just confusing the active lenders and it reflects poorly on the borrower.
Also beware of competition. Some brokers or lenders have competitors where they cannot show your deal to. Go with a broker that can shop your loan with any lender.
Certainty of Close
Now more than ever it is important to go with a lender that can close. There are too many stories going around with loans getting dropped right before closing with hard money on the line.
This can be avoided if you go with a broker that has relationships with lenders that can close the deal. Now is not the time to take a flyer and risk earnest money.
Financing contingencies might start making a come back on LOI’s. We have not seen them be competitive yet, but the landscape is changing rapidly.
Conclusion
Go with someone you know, like, and trust. Go with a debt broker that has relationships that can close a deal. Do not burn bridges in the multifamily business. In times of uncertainty and you have a lot of money on the line go with a lender that can get the deal done. The market is the market and anyone trying to beat the market is taking on a lot of risk.
The buyers and sellers of multifamily are off by 10% or more on price right now. With a looming recession it is not a good time to stretch to make the numbers work and hope unrealistic loan terms will bridge the gap.
