Interest Rates Do NOT Matter! tagged:

Interest Rates Do NOT Matter!

Posted by in Brian's Blog

Solutions do. I just secured a deal for a “cream puff” borrower at almost 12% on the interest rate. Here is the scenario….

The guy called and wanted cash-out on his building. The building was worth $800,000 and he owed $150,000. He wanted to do a loan for $400,000 and pull out a little over $200,000 to use for other investments. He had 700 credit scores, and the property cash flowed to support it. He said his current rate was 7% and he wanted to get lower than that. Most LO’s would think-slam dunk, 50% LTV and 700 score and cash flowing. And start shopping. But I know better.

First, investor loans below $500,000 are tough to get. Throw cash out into the mix, especially pulling out more cash then he currently owes, makes it even tougher. Added to that the market place was not a major metro area and you have a loan that almost no one is going to do. I have one lender that I know of that will do that deal, and their rate is about 12%. BUT, it is a 25 year fixed with no balloons. Sure, I could dial for dollars among local banks and if I make 100 calls, might find someone to do the loan but chances are, I may not. And the deal is way too small to do that anyway. YOU MUST KNOW THAT AS A BROKER, THE CLIENT HAS AT LEAST TRIED HIS NORMAL BANK. YOU ARE NEVER THE FIRST OPTION. SO he has already been denied. I know this without asking. The bottom line is the client will NOT get what he wants, $200,000 plus cash out and a low rate. He needs to decide whether he wants the cash out or not. So often, this is where the deal dies. The average broker will NOT share this with the client. They will either not present the deal at all because they are embarrassed about the rate, or they will offer those terms apologetically. YOU NEED TO BE FIRM WITH CLIENTS AND GIVE THEM REALITY, NOT THEIR WISHES. It is NOT about what the client wants, but about what he can get in today’s environment.

So here is how I sold him, “John, here is the bad news. In today’s marketplace, cash out is a no-no. Banks are sketchy and even though you are a great borrower, this much cash out on a project this small will just not fly. The good news is I have a source that can get you the nearly $250,000 you need in cash out. You wanted the longest fixed rate because you were worried about rates going to 15% in the next 5 years and you know that if you do a shorter term note, you will have to refinance and possibly get stuck with that rate. This product is fixed for 25 years and you will never have to refinance. And, the payment of $4212 is fully covered by your tenants. This payment will allow you to show this property at break even or even a slight loss on your taxes after depreciation so it will benefit your tax liability as well. Are you ready to get the cash and lower your tax burden all at once?”

He said, boy that is awesome. But what kind of rate is that? I shared with him 12% and he said, “that is too high”. I stood firm and said, “john, if you want a rate and term loan then you can get a rate in the 6’s. Of course, in 5 years you will need to refinance and who knows, you could go to 15%. But if you want cash out, and a 25 year fixed so your rate never goes up, this is your ONLY option. Not only that, but the payment is still covered by your tenants AND this improves your tax burden! It is a huge win-win.” He agreed and signed.

Do you see the difference? RATE IS NOT THE ISSUE IN COMMERCIAL-THE PAYMENT AND THE GOAL IS KEY. Brokers lose deal after deal over rate and it is simply because they are not firm, not confident, and focus on the wrong things. This was a strong borrower who wanted a rate in the 6’s-if you focused on his wish list this is what you would be shopping. But his wish list does not matter-what can he actually get approved for-that is the key. And when you have the best he can get, you sell PAYMENT AND SOLUTION-not rate. Try it and watch your conversions soar!  -Brian