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Real estate investors looking to secure debt could face significant challenges due to today’s market conditions. As I mentioned in a previous article, bank failures and rising interest rates have led to a tighter lending environment. Borrowers may need to search far and wide for the financing they need and bring more of their own money to the table. Resources such as a local bank might not be as readily available as they were in the past.
Given these trends, working with a mortgage broker is a crucial step when securing financing for a real estate investment. These professionals serve as an intermediary between borrowers and lenders in the commercial space. If you don’t have a mortgage broker already, you’ll want to tap your network to find one as you build the capital stack and prepare to make an offer on a property.
The Advantages of a Mortgage Broker
Rather than going out on your own or relying on your own data, you’ll be able to gather more options and insight with a mortgage broker. These professionals operate in the lending environment day in and day out, which can give them an inside edge into what sources might be available. They’ll often know who the active lenders are, and those players could extend beyond traditional banks. Mortgage brokers may be aware of private lending sources and have insight into activity related to insurance companies and the commercial mortgage-backed security (CMBS) market.
These professionals can help you match the right debt for the deal. It can be valuable to have several choices available when securing debt to avoid getting into a tight financial position. If you’re trying to lock in and commit to a purchase price and aren’t able to get a commitment from a lender until 60 days later, the rates may have changed by then. The lender could come in and appraise the property, and then reduce the loan proceeds. As such, you’ll want to have backup plans in place so you can fall on them if needed.
As you’re looking at a property, a mortgage broker may be able to advise you on how to reposition it to make the proceeds more favorable. In some cases, a mortgage broker might have an earn-out provision. If you improve the performance of the property, you may be able to increase the loan. A good mortgage broker should be able to negotiate these for you.
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Working with a Mortgage Broker
Before you start bidding, you’ll want to talk to a mortgage broker to get an idea of the available financing for your investment. These professionals can evaluate your position and help determine if you are bankable. You’ll also be able to see what you might have to bring to the table in terms of equity. Mortgage brokers will often charge 1% of the loan, though you’ll want to discuss fees so you know what to expect.
As you work together, a mortgage broker can help you sort through whether lenders will make you personally guarantee a loan. For real estate investments, non-recourse is always best, as you won’t be putting your own assets at risk for the loan. However, there could be cases in which you are asked to personally guarantee a loan until certain conditions are met, such as a lease out on the property. A mortgage broker can help you prepare and maneuver these steps, and set up a plan for special circumstances, such as a major tenant vacating a property.
Given the current lending conditions, you may find that traditional go-to lenders are not in a position to offer financing. This further fosters the need to work with a mortgage broker to secure debt. They’ll understand the lending beat and how it relates to your chosen asset class. Ultimately, a great mortgage broker can help you fill out the capital stack, enabling you to get a solid picture of the debt and equity layers in a deal.