Reputation is everything in commercial lending. Banks need to have a good reputation to attract quality customers. Private lenders have to be established and show a strong track record of closing loans to attract new commercial loan borrowers. In this same manner, commercial loan brokers / consultants must also have a strong reputation.
There are several ways to check the reputation of a commercial loan broker / consultant you are thinking about working with, as well as some warning signs to watch out for. They include the following:
1) How did you hear about your broker? If it was a referral from a lender, friend, or someone who has worked with that broker before, that should carry a lot of weight and make you comfortable that individual is trustworthy. If you heard of that broker from an unreliable source, you may want to check their background and ask for some references.
2) Check out a broker’s references. Any broker hesitant to provide you with references is likely someone you should not be working with. If you take the time to check the references, be sure they are for people who have actually gotten financing through that broker before and not just a random friend of the broker or someone who applied and did not get financing done.
3) Be wary of brokers that charge up front fees. If a broker is confident they can get a loan request funded, then they are not going to require an up-front fee. However, if they are not confident they can get the loan funded, the only way to get paid for working on it is to charge a fee up front. Charging a fee up front also takes away some of the incentive for the broker to work hard to get the deal done because they are getting some pay no matter what. All good brokers should work on a “Success Fee” basis, meaning they only get paid when you close on your financing.
4) Be very wary of brokers who do not charge their borrowers fees directly or disclose to their borrowers their fees. A good broker will at least disclose and enter into a fee agreement with their client on the front-end. That way the client knows exactly what they are paying for the broker’s services. If they don’t disclose or hide their fee from the client, then it is likely the broker’s fee is getting baked into the deal with a higher interest rate or additional fees from the end-lender to the client, which might end up being more expensive to the borrower or cost the borrower more than they would have been willing to pay directly had the fee just been negotiated between the borrower and the client.
5) Make certain that any broker agreements you sign don’t obligate you to pay any fees until a closing takes place, and that just because a broker gets you an approval you are not obligated to accept that approval or pay the fee at time of approval. You want your broker to be working in your best interests, and only get paid for procuring you financing that you want and that fits your needs, and not just whatever is out there in the market.
6) In most cases a borrower should not have to make deposits for third party costs (such as appraisals, environmental reports, etc.) until there is a loan approval in hand from a lender. Be sure that approval is a commitment or a very strongly worded proposal letter just contingent on the third party reports, and be sure you pay the third party fees directly to the lender. That is the only way you can assure the fees are not being marked up and will go to pay for reports actually needed to get your loan done. If the broker requests appraisal fees without an approval or strong commitment letter, chances are they will not end up getting used to pay for the appraisal.
7) Very few lenders require commitment fees anymore and typically only in cases of a private equity loan, conduit loan, Fannie Mae loan, or a complicated deal that needs to close quickly and the lender wants assurances the borrower is moving forward before investing the time in getting to closing. If there is any sort of commitment fee, be sure it is refundable and gets applied to closing costs at time of closing and is not just a fee earned for issuing an approval. Also be sure the commitment fee gets paid directly to the end lender, and you have a firm loan approval in hand before paying the fee from the lender.
8) Lastly, be very wary of any commercial loan brokers / consultants that produce any sort of approval or commitment letter on their own letterhead. In most cases a broker is not the end lender, and is merely an intermediary. Because of this they cannot control the actual funding of a loan, so any approval issued by them is meaningless. If they have an approval from an actual end-lender, ask to see that approval. The only reason for them to hide an approval is either because they don’t have one, or they are charging a higher rate and fee than is in the approval and baking more into the deal that way. At the end of the day you end up with the relationship with the new lender, so you should see and understand the approval from that lender. Plus the only way you can be assured there is an actual approval or commitment in place is to see the actual lender approval letter.
There are plenty of good commercial loan brokers / consultants in the marketplace. The key is finding a good one that understands commercial lending and who is forthright and fair. Like in any industry, there are also plenty of bad brokers out there. By watching for the above warning signs, you are likely to avoid the bad ones and find the goods ones you can trust to help get your commercial loan done.