As a residential mortgage broker, chances are you’re always looking for ways to increase your revenue. If this is the case, you’re in luck. There’s an under-served market with plenty of pent-up demand that any residential broker can navigate with the right know-how: small multifamily mortgages.
You may ask, “I understand multifamily mortgages, but why is it worth my time to focus on small-balance loans?” The reason is because as the loan amounts for multifamily properties decrease, the competition among brokers also decreases, which means there are plenty of opportunities and money to be made within this niche.
Adding small-balance multifamily mortgages to the services you offer is a great way to boost your revenue that doesn’t require a lot of extra effort on your part.
Before you can start working with borrowers who need loans for small multifamily properties, however, you need to get to know the market.
Understanding the niche
A small multifamily loan usually is defined as any loan less than $5 Million. At many banks, the minimum multi-family loan amount is $1 million, as anything less is generally not considered profitable. Competition tends to be minimal for mortgage professionals who focus on multifamily borrowers seeking $500,000 or less.
Enter the small multifamily lender. These lenders often service non-bankable borrowers, and much of their business comes from residential brokers. These are the lenders you’ll work with should you decide small multifamily mortgages are a product you’d like to offer.
When you work with the lenders in this niche, you’ll usually make between 2.5 points and 3.5 points. Some small multifamily lenders will protect a broker up to 5 points. This can result in lucrative profits for you. For example, if you have a borrower who needs a $350,000 loan and you receive 3.5 points, that’s $12,250 in your pocket after close, and it won’t mean much extra work for you. Another benefit of small multifamily loans is that they can often close in as little as two to three weeks, so you receive the money quickly.
Once you enter the small multifamily mortgage market, you’ll work with borrowers who need financing to pay off debt, expand their businesses or purchase commercial real estate, but are unable to qualify for Small Business Administration (SBA) or bank loans because the amount required is too low.
When prospecting for small multi-family deals, start by considering your past customers. Some of the clients you secured residential financing for also may own multifamily investment property. Another good source for leads is contacting local banks about customers whom they’ve turned down. Banks usually look to recommend alternative financing to non-bankable clients to salvage the business relationships. It’s also a good idea to speak with any accountants, lawyers and real estate agents you’ve worked with, as they might know of non-bankable clients seeking commercial loans.
Some of the borrowers looking to obtain small multifamily financing will be turned away for reasons other than low property-value amounts. Some you choose to work with will be turned away for less-than-perfect credit. They will most likely have a good reason; for example, they were hit particularly hard by the recession, there have been serious health issues in the family or another legitimate reason why their credit scores have taken a hit.
Many of these borrowers are turned down by banks and the SBA because these institutions have stricter credit guidelines. As a result, they can’t obtain traditional financing no matter how plausible their explanations. You also might choose to work with clients dealing with tax issues that might cause a bank or SBA turndown. Borrowers could look to refinance hard-money deals or simply may not have time to wait for a bank loan to close.
Submitting a deal
Most small commercial lenders that work with non-bankable borrowers have minimal requirements when a deal is submitted. Generally, you’ll need a loan summary to explain the deal, a completed 1003 loan application or personal financial statement and a tri-merge credit report to get started. You also should know the rents and other expenses for which your client is responsible. Addition-ally, you should know when your borrower bought the building and how much was paid, explain why your borrower wants the loan, give an explanation of your borrower’s credit problems (if applicable) and, for purchases, identify where the down payment is coming from.
Once you’ve submitted your deal, the lender probably will have questions or need more information from you and your borrower. You should guide the borrower through this process, and most lenders will be eager to help. If the lender likes the deal, it will issue a commitment letter. A few small-balance multifamily lenders even will handle processing and closing the loan. In these cases, you may need to be available for additional questions, but the majority of your work on the deal has been done. There’s not much left to do but wait for your check.
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As a residential broker, it’s easy to say “no” when someone comes to you with a request for small multi-family financing. Saying no is essentially throwing away money, however. The small multifamily market tends to be overlooked, so there are always plenty of borrowers looking to do business with a broker. Adding small multifamily loans to your product offerings not only benefits borrowers in the market, it gives you the benefit of growing your business and revenue. It takes a little extra work and education to navigate the market successfully, but your efforts will pay off in the end when you say “yes” to small multi-family loans.
This article was originally published in the February 2014 commercial edition of Scotsman Guide.