What’s Going On With Interest Rates?

by Doug Marshall, CCIM
Market Assessment

Over the past 60 days, the yields on 10-year Treasury notes have increased from 2.41% on October 8th to 3.53% as of December 15th, an increase of 1.12%.

What's going on?

Let's begin with a US Bonds 101 class. The 10-year Treasury note has become the security most frequently quoted when discussing the performance of the U.S. government bond market and is used to convey the market's take on longer-term macroeconomic expectations.

All of the marketable Treasury securities are very liquid and are heavily traded on the secondary market. The treasury yield expresses the relationship between the face value of the security and the amount of return the investor receives.

If there are more investors selling bonds then those who are buying bonds, the value of the bond declines (the law of supply and demand). A reduced price on the bond results in an increase in the yield or return on the bond.

Another name for “treasury yield” is “interest rate” which those of us in commercial real estate follow very closely. When US Treasury rates jump up significantly, like they have since early October, it means that investors are dumping their bonds in huge quantities. I can’t recall the last time I’ve seen interest rates jump so dramatically over such a short period of time.

So the $64,000 question is, “Why are bond holders selling off their bonds?” I have surfed the web for an answer to this question and unfortunately there is no agreement among the experts.

Depending on who you like to read there are a variety of answers. But being fearless and little bit stupid I am going to give you my opinion (take it for what it’s worth).

But before I give you my assessment of the situation let me muddy the waters a bit with some conflicting information.

Data released by the Treasury Department yesterday indicated that the Federal Reserve, China and Japan have recently been on a U.S. bond buying binge. The Fed is now owns $972 billion in Treasury holdings which surpasses China’s $906 billion (now the 2nd largest hold of U.S. treasuries).

And with more Quantitative Easing 2 purchases on the horizon it is highly probable that this lead will be greatly extended.

At the very same time, the debt crisis in Europe with what has happened in Greece and Ireland is continuing. Adding to the problem, on Tuesday Moody’s downgraded Spain’s sovereign debt causing further turmoil in the bond market. There is a very real debt crisis going on in Europe which is resulting in European investors transferring their wealth into (you guessed it) U.S. treasuries.

So in recent weeks bond purchases have been exceptionally strong by the major holders of U.S. debt and by the Europeans concerned with their own debt crisis but not nearly enough to offset all the little guys out there who own bonds and who are running scared.

Why are they running scared? There are two reasons that I think make the most sense

1. The Fed’s policy of QE2 is not working as planned. The printing of money by the U.S. Treasury and the purchase of these bonds by The Fed is perceived by the holders of bonds to be inflationary which makes their modest fixed yields less desirable if inflation is going to come roaring back
2. The other issue spooking bondholders that’s surfaced recently is the possible agreement by the Obama administration and Congress about extending the Bush era tax rates for another two years.
   

The compromise between the White House and Republicans included extending employment benefits for another 13 months which combined with extending the existing tax rates will increase the national debt by another trillion dollars. This means the U.S. Treasury will need to issue more bonds to cover the debt.

That being said, I believe that Ben Bernanke will do everything in his power to calm the bond market. What tricks he still has in his bag is anyone’s guess but he will do whatever he can to avoid runaway inflation.

Stay tuned. It’s beginning to get interesting.

Sources:
Fed Surpasses China in Treasury Binge, The Street by Eric Rosenbaum, December 15, 2010;
United States Treasury Securities, Wikipedia;
Bond Prices Fall Sharply after Federal Reserve Says It Will Continue to Boost Economy, The Associated Press, December 14, 2010.

What the heck is Quantitative Easing?

Doug Marshall, CCIM
Market Assessment

If you’ve listened to the news or read a newspaper in recent weeks there is a new buzz phrase being bandied about: Quantitative Easing. So what is it?

The term Quantitative Easing (QE) describes a form of monetary policy used by The Federal Reserve to increase the supply of money in an economy when the bank interest rate, discount rate and/or interbank interest rate are either at, or close to, zero.

The Federal Reserve does this by first crediting its own account with money it has created ex nihilo ("out of nothing") or some would say, by “printing money.” It then purchases financial assets, including government bonds and corporate bonds, from banks and other financial institutions in a process referred to as open market operations.

The purchases, by way of account deposits, give banks the excess reserves required for them to create new money by the process of deposit multiplication from increased lending in the fractional reserve banking system. The increase in the money supply thus stimulates the economy.

What is the purpose of Quantitative Easing?

The Federal Reserve has been given two mandates:

1. It is charged with ensuring full employment in the United States; and,

2. It is also charged with ensuring price stability. Inflation, in recent months, as measured by the CPI (Consumer Price Index), has declined to almost zero which is well below its target of two percent annually.

The Fed hopes that QE will stimulate the economy and thereby ease unemployment.

The Fed also hopes QE will bring the U.S. closer to its stated long-term inflation target.

The primary risk of QE is that it can spark inflation greater than desired or even hyperinflation. Or it could have no impact whatsoever.

Ben Bernanke, Chairman of the Federal Reserve, may be the “smartest guy in the room” but when he’s tweaking the largest economy in the world it is near impossible to really know what the impact The Fed policies will have on the economy.

What has been the impact of Quantitative Easing so far?

The first round of Quantitative Easing took place at the height of the financial crisis in late 2008 and early 2009. What impact did QE have on the economy and interest rates? Good question. I’m not sure anyone knows for sure.

Just recently the Federal Open Market Committee announced another round of Quantitative Easing called QE2. The Fed plans to purchase over $600 billion of long-dated Treasury securities over a period ending in June 2011.

Economists are debating what impact QE2 will have on interest rates. Ted Jones, PhD, Chief Economist for Stewart Title, says it has already significantly increased interest rates and uses the following table to support his position.

The table details the changes in constant-maturity Treasury rates since August 1, 2010. While rates are still comparably low, they have risen significantly in recent weeks.

As noted below in the table three-year Treasury yields are up 80 percent from the low just two weeks ago while two-year notes are up 60 percent. Even the 30-year Treasury yield has jumped 24+ percent since the end of August.

As convincing as this table is in supporting Dr. Jones’s opinion, I don’t think anyone can know for sure if the recent rise in interest rates can be directly attributed to the announced purchase of $600 billion of treasury securities over the next several months.

It seems to be too sharp of a rise in rates and it happened too quickly after The Fed announcement to be attributed to QE2.

But then again, who am I to disagree with such a distinguished and well qualified expert? We should know though in the next few months whether Dr. Jones is right or not. Let’s hope for all our sakes he’s not.

Sources:
Quantitative Easing by Wikipedia;
Does Quantitative Easing Work in Boosting the Real Ecomony? by Edward Harrison, November 4, 2010;
'Quantitative Easing': What Does It Really Mean for Investors?, Jeff Cox, CNBC.com, August 23, 2010;
Quantitative Easing Already Goosing Interest Rates, Ted Jones, Jones on Real Estate blog, November 14, 2010.

Why Interest Rates Will Rise

Doug Marshall, CCIM
Market Assessment

Shown below is an article written by Ted Jones, PhD who is the Senior Vice President-Chief Economist for Stewart Title Guaranty Company.

Mr. Jones opines about why interest rates will rise in the near term. He predicted back in August that rates would rise 100 basis point increase (1%) before the end of this year!


I wrote last month how a typical Japanese investor that had purchased a two-year Treasury note lost more than 10 percent per year on their investment – see post from September 27th – and that the only way they would keep coming back and buying U.S. Treasury instruments would be an increase (eventually) in interest rates.

Since then at the 17 economic forecast presentations I have given, the issue of rising rates seems to be most contemptuous by the audience. Simply stated, they believe that with no demand for money rates should not rise.

My response is that there is massive demand for money—but not in the typical avenues of home purchases, autos and other durable goods—and that is in record federal deficit financing and corresponding record-trade deficits.

Just look at the article link from the Wall Street Journal on Friday. The August trade deficit approached $50 billion ($46.3 billion to be exact) of which $28 billion was with China (and the $28 billion was an all-time record). Wow.

Add that to a massive Federal deficit in this past fiscal year of $1.3 trillion in 2010 and an a projection of $1.1 trillion in 2011 (that’s the off-budget surplus which reduces the deficit by estimated excess Social Security cash flows—with the 2011 on-budget deficit of $1.154 trillion) and you are looking at almost a couple of trillion of equivalent borrowing. Massive.

Looking at it another way, just contrast the Federal deficit of 2009 through 2011 to total commercial real estate lending in place and total first-lien residential loans in place.

Fannie Mae estimates that as of 2010 first-lien residential lending outstanding is $9.6 trillion and other sources tally total commercial real estate lending at $3.5 trillion. Total Federal deficits in 2009, 2010 and 2011 are estimated to be $1.4 trillion, $1.3 trillion and $1.1 trillion, respectively, for a total of $3.8 trillion.

That means that in just a 36 month period, the Federal government borrowed more money than all of the total commercial real estate loans outstanding. When comparing residential lending, that equates to 40 percent of the amount of the total first-lien lending outstanding on U.S. homes. Now you see that there is significant demand for borrowing.

Now throw in the inflation data contained in the linked Wall Street Journal article, and you might start being a believer in rising rates. Wholesale prices in the past three months jumped 1 percent (and yes—that includes energy and food, but unless you do not eat nor use any energy then that remains the appropriate factor) which annualizes to a potential 4 percent annual wholesale inflation rate.

The Fed released on Friday their expectations on inflation, but do not be surprised if they respond by stating they are going to increase the money supply by printing more money—which in the long run will be inflationary.

And that is my two cents. Or with inflation 2.08 cents……

I hope for all of our sakes that he is wrong about rising interest rates. What impact would a 1% rise in interest rates, over a short 3 month period, do to commercial real estate sales?

My guess is that everything would come to a stop until cap rates adjusted upward. And if you haven’t refinanced your properties, what are you waiting for?

Global Economic Issues Raise Their Ugly Head

Doug Marshall, CCIM
Market Assessment

I thought you would find the following article from Pacific Investment Management Company’s Chairman, Mohamed A. El-Erian interesting and informative.

This article was originally published on ftalphaville.ft.com on September 19, 2010. PIMCO is an investment company that manages the Total Return fund, the world’s largest mutual fund.

Shown below are Mr. El-Erian’s thoughts about two very important global economic issues.

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This coming week will be an interesting one. I am not just thinking of Tuesday’s FOMC meeting in Washington that will shed light on whether the Federal Reserve revises down its economic growth projections (it should and, I suspect, will) and expands non-conventional policies (it will, but probably not at this meeting).

I am also thinking of two other issues which were left to simmer quietly over the last few months when most of the focus was on America’s "recovery summer" — or, to be more exact, the lack thereof.

The first pertains to Europe. Solvency concerns are again on the rise there.

Last week’s catalyst was Ireland where banking issues are a serious worry. But the underlying problems are deeper and more complex.

Market measures of risk for peripheral European countries (Greece, Ireland, Portugal and Spain) are at or near danger levels… despite exceptional support from the European Central Bank, the European Union and the International Monetary Fund, and despite the implementation of adjustment measures on the part of some.

The failure to reduce risk spreads means that the public sector bailout is not working. Rather than provide assurances of better times ahead and, thus, encourage new investments, ECB/EU/IMF support funding is being used by existing investors to exit their exposures to the most vulnerable peripheral European countries.

This situation cannot be sustained forever. It undermines any chance that the most vulnerable countries (e.g., Greece) have of limiting the collapse in their GDP and maintaining social cohesion; it contaminates the balance sheet of the ECB; it exposes the revolving nature of IMF resources to considerable risk; and it raises the risk of renewed contagion.

The second issue is even more complex. It pertains to the global configuration of currencies.

Last week, Japan intervened massively to stop its currency from appreciating. It did so in a unilateral fashion and, immediately, faced criticisms from Europe and the U.S.

Meanwhile, in a sharply-worded testimony to Congress, Treasury Secretary Geithner provided lots of data to those that feel that the U.S should have already labeled China a currency manipulator.

And while China has recently accelerated the rate of its managed appreciation — 1% in the last week compared to just 1.6% since the country declared great "flexibility" back in June — this is proving insufficient to counter growing currency tensions.

These latest foreign exchange developments bring to the fore an inconvenient reality. While not all industrial countries wish to make it explicit, they are happy (indeed eager) to see their currencies depreciate.

They see this as helping them address the extremely difficult challenges associated with a protracted period of low growth, high unemployment, and limited policy effectiveness.

The list of industrial countries wishing to depreciate their currencies is not matched by a list of emerging economies happy to let their currencies appreciate significantly.

As a result, foreign exchange tensions are mounting, and the price of gold has been driven to a new record level.

This week will shed light on whether policymakers can do anything to deal with these two issues. If they continue to stumble and hesitate, what has been simmering may well come to a full boil in the next few months.

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You may ask, “Who cares about these global economic issues?” The reason to be concerned is that the global economy has a very real impact on the U.S. economy, for good or for ill.

The global community is now intertwined with each other in ways never before experienced. We’re all in it together.

Let’s hope that the power brokers, government bureaucrats and ivory tower economists know what they’re doing for the stakes are extremely high.

Banks On The Rebound

Doug Marshall, CCIM
Market Assessment


Second quarter banking results show strong evidence that U.S. banks are beginning to dig themselves out of the big hole they’ve been wallowing in for the past three years.

Among some of the rosier statistics are:

• The FDIC second quarter numbers showing 90-plus day delinquencies leveling off and eventually set to decline because 30-89 day delinquencies are declining. Also, net charge-offs are leveling off too.
• The banking industry’s quarterly earnings of $21.6 billion are up dramatically from a year ago loss of -$4.4 billion and represent the highest quarterly earnings since the third quarter 2007.
• Sixty-five percent of the banks are reporting higher year-over-year quarterly net income.
• Loan loss reserves are showing improvement as insured institutions added $40.3 billion in provisions to their loan loss allowances in the second quarter. While still high by historic standards, this is the smallest total since the industry set aside $37.2 billion in the first quarter of 2008.

“Without question, the industry still faces challenges. Earnings remain low by historical standards, and the number of unprofitable institutions, problem banks and failures remains high,” says FDIC chairman Sheila C Bair.

“But the banking sector is gaining strength. Earnings have grown, and most asset quality indicators are moving in the right direction.”

Regionally, Sterling Savings Bank has been successful in raising the required funds to stay in business while Bank of the Cascades has asked for another extension.

Having both of these banks come back from their death beds would be encouraging to a Pacific Northwest economy that has been slow to recover.

From our perspective at Marshall Commercial Funding, we are witnessing a number of lenders coming back into the market in the last few months, some with very favorable rates and terms.

It’s too soon to say the banking crisis is over but it is encouraging to see the baby steps being taken in the right direction.

Sources:
U.S. Banks Report CRE Loan Troubles Subsiding Amid Strong Quarterly Earnings, CoStar Group, September 8, 2010;
Sterling Financial hits $730M investment goal, Portland Business Journal, August 28, 2010;
Bank of the Cascades gets another extension, Portland Business Journal, July 16, 2010.

The Apartment Market is on the Mend!

Doug Marshall, CCIM
Market Assessment

Whether you read the Norris & Stevens most recent Apartment Investors Journal or listen to CoStar’s recent webinar overview on the U.S. apartment market or read Portland State University’s Real Estate Quarterly for August, all are in agreement – THE APARTMENT MARKET IS ON THE MEND!

The apartment market bottomed out in the last half of 2009 and several factors indicate that it has turned a corner, such as:

• Vacancy rates have dropped
• Concessions are being reduced
• Effective rent growth has turned positive
• Demand for apartments is up
• Supply of new rental product is down
• Cap rates are being compressed

Vacancy rates have dropped – according to the Metropolitan Multifamily Housing Association the apartment vacancy rate for the Portland metro area is currently 5.1%, down from 5.9% in the fall of 2009.

Nationally, CoStar is reporting a decline in apartment vacancy from 8.4% last year to about 8.0% at the end of the second quarter of 2010.

Concessions are being reduced – concessions are more difficult to track but generally it is believed, and anectdotal evidence suggests, that there are fewer concessions being offered and for smaller amounts than last year at this time.

Effective rent growth has turned positive – according to Norris & Stevens, older apartments have increased rents 0.8% and newer units increased 2.34% from 2009 to 2010.

CoStar is reporting positive effective rent growth of about 0.7% for Class A & B properties in the first half of 2010, the first time since the fourth quarter of 2008; effective rent growth for Class C properties is almost at breakeven.

Demand for apartments is up – Norris & Stevens report cites a Barron’s article which projects a decrease in home ownership from the current 67.2% of all households to 64% by 2015.

Apartments will gain a stronger market share as many families lose their homes to foreclosure. Stricter lending guidelines for home loans will continue this trend. For every 1% drop in home ownership results in 1.4 million new rental households.

Supply of new rental product is down – according to PSU’s Real Estate Quarterly Summer edition new apartment construction has experienced a strong drop off in 2009 and for the first half of 2010.

Historically, Portland has averaged almost 2,000 permits for multi-family units annually. Last year Portland issued 235 multi-family permits and through June of this year only 164 units. Washington, Multnomah & Clackamas counties have experienced similar declines.

Cap rates are compressing – CoStar reports that cap rates have declined from 7.0% to 6.4% in the past 6 months.

However, there are too few sales in the Portland market to show a trend. Norris & Stevens reports cap rate averages by county ranging from a low of 6.5% to a high of 8.73%.

This all bodes well for the apartment investor. The big question is when will the other property types follow along?

Who’s Financing Transactions for the First Six Months of 2010?

Doug Marshall, CCIM
Market Assessment


In my last market assessment we analyzed the transaction activity for the first 6 months of 2010 compared to previous years.

This information was taken from the CoStar database for transactions above $1 million, for investment properties (no owner occupied) and for the geographic area from Kelso to Eugene along the I-5 corridor including Bend.

To summarize, there were a total of 59 sales transactions for the first half of this year; transaction activity peaked in 2007 at 251 and has stair stepped downward each subsequent year to where we are today. This represents a 76% reduction in sales activity since 2007.

For more details on the sales activity in our geographic area since 2006 I encourage you to read my last market assessment.

Of the 59 transactions closed in the first half of 2010, 51 transactions identified the lender. Shown below is a summary of these lending sources:

	All Cash Buyers	17	33%
	Loans Assumed	2	4%
	Local/Regional Banks	7	14%
	National Banks	10	20%
	Fannie Mae	6	12%
	Seller Financed	9	18%
		51	100%

There are a couple interesting tidbits from this data: 1) 54% of the transactions did not require conventional financing; they were either all cash buyers, the existing loans were assumed or seller financing was used; and 2) there were no life company loans, which refutes the myth that the life companies are actively seeking loans. If they are, it doesn’t show up in the data.

Another tidbit of information from the sales activity that you may find of interest is broker representation.

Of the 59 transactions, 48 identified the broker’s involved; eleven did not provide sufficient information to know if there was broker representation in the transaction. But of the 48 transactions that provided information on broker involvement this is how it broke out:

	Both sides represented	29	60%
	No buyer's broker	11	23%
	No brokers involved	8	17%
		48	100%

In other words, there were 69 paydays (29 x 2 + 11) for the brokerage community in the first half of 2010. It will be interesting to compare 2011 transactions with this year’s sales activity.

A year from now will we look back and see that we have turned a corner? For all of our sakes, I hope so.

Sales Activity, First Six Months of 2010

Doug Marshall, CCIM
Market Assessment


The first 6 months of 2010 has come and gone and we’re well into in the second half of the year!

Tanya Williamson, in my office, analyzed the transaction activity this year and compared it to the activity in the first six months for the last four years to get an idea of where things were and where they are today.

To come up with this information she used the CoStar Database focusing on the criteria below:

· Transactions Closed January 1^st to June 30^th of Each Year

· Investment Activity Only

· Office, Flex, Industrial, Retail, Mixed Use, and Multi-Family Properties

· Transactions $1M and Higher

· Arms Length Transactions Only

· Transactions Completed Along the I-5 Corridor from Kelso to Eugene, including Bend

Based on the criteria above she came up with the transaction activity for the first 6 months for each of the last 5 years, which is seen below.

2006 – 201
2007 – 251
2008 – 140
2009 – 86
2010 – 59

She went even further and broke the transactions down by property type and put together the chart below:

Here are the actual figures used in the chart above:

	Multi-Family	Retail	Office	Industrial	Mixed	Flex
2006	90	52	21	27	5	6
2007	86	75	38	32	14	6
2008	60	23	28	24	2	3
2009	35	16	17	13	5	0
2010	25	24	2	7	1	0

This information does not include transactions under $1 million or owner-user properties so the actual activity is higher for each year but this gives you an idea of investment activity over the years for properties sold for $1 million and higher.

It’s really eye-opening to see how low the activity has fallen from the peak; it really puts the severity of this downturn into perspective.

It’ll be really interesting to see the activity for the first 6 months of 2011, hopefully the trend doesn’t continue and things start to creep up again.

For the next update we’re going to focus on the 2010 activity seen above. We will breakdown how those 59 transactions were financed to give you an idea of the financing activity in our area.

It should be interesting to see how many of those transactions were all cash buys or seller financed.

Stay tuned.

How to Get the Best Possible Loan for Your Property

Doug Marshall, CCIM
Market Assessment

You have three basic options to consider when shopping for a commercial mortgage loan. You can choose to:

1. Finance your property with a lender you already do business with,
   
2. Shop the mortgage market on your own, or,
3. Employ the services of a commercial mortgage broker to shop the market.

For most property owners the option that significantly improves your chances of getting the best possible loan for your property is using the services of a mortgage broker.

As self-serving at that may sound, come to your own conclusion as you review the advantages and disadvantages of each option discussed below.

Option #1 – Finance your property with your existing lender
Convenience is the primary advantage of financing your property with a lender you currently do business with. It certainly is the path of least resistance and in most cases it should be the quickest way to get the job done.

The disadvantage of this approach is that you will never know whether you received the best rates and terms currently in the market. The likelihood is that another lender will be more competitive than your current lender.

Option #2 – Shop the mortgage market on your own
The advantage of this option is that you have a higher probability of finding better loan terms than financing your property with your existing lender.

The disadvantage is that it will take considerably more time and effort on your part. If you take this option I have these suggestions for you:

1. Hunt down the most competitive lenders
Contact commercial real estate professionals (real estate brokers, appraisers, escrow officers, etc) or other owners of commercial real estate who can recommend lenders for you to contact.

2. Contact several lenders for loan quotes
To do this correctly you should put together a preliminary loan package that includes at a minimum the following documentation:

a. Two years plus the current YTD operating history on the property,
b. A current rent roll,
c. Photos of the property,
d. Personal financial statements on the borrowers,
e. Two years of personal tax returns, and
f. A brief resume on the owners

Ask each lender to provide you their loan quote in writing. Fight the urge to accept a loan quote over the phone. A loan quote over the phone is meaningless. Get it in writing.

3. Let Lender A know that Lender B has a better loan quote
It is not uncommon, even in today’s lending environment, that if a lender knows they don't have the best quote on the table that they will go back to their underwriter and see if they can tweak the quote to make it more competitive.

Asking for an improvement in a loan quote should be done tactfully. If done in a heavy-handed manner it will only irritate the lenders which may backfire.

4. Do not focus too heavily on one loan parameter
Often times a borrower chooses the lender that they consider best based on one particular “hot button.” There is nothing wrong with this approach, but a better approach is to review the pros and cons of each loan quote and then decide.

It is not uncommon that when comparing the loan quotes in detail, another lender is chosen rather than the one originally considered the borrower’s first choice.

5. Do not dribble the loan documentation to the lender
Once you have chosen your lender, one of the most important recommendations I can give you is to make the loan process as easy as possible for the lender. You do this by completing the lender’s forms quickly, thoroughly and accurately.

A borrower who is unwilling to focus on getting the forms to the lender in a timely manner is putting the loan at risk.

6. Do not violate the “golden rule” of lending
...Which is, “He who has the gold makes the rules.” Each lender has its own unique way of underwriting, processing and closing loans. Don’t get into an argument about their process. Provide them with what they are asking for and you’ll be better off in the end.

Option #3 – Employ the services of a commercial mortgage broker to shop the market
There are four distinct advantages of taking this option:

• The primary advantage of using a mortgage broker is that they know which lenders have the most competitive rates. It’s their job to know.

• Compared to shopping the market on your own, this option takes significantly less time and effort on the part of the owner. Much of the “heavy lifting” of finding the right lender and processing of the loan is performed by the mortgage broker, not by you.
  
  
• Establishing trust between the borrower and the lender is a vital component to insure a successful loan outcome. If you’ve never worked with a particular lender, a trust relationship has not been established.
  
  On the other hand, a commercial mortgage broker may have worked on several loans with this lender.
  
  They know each other. They know each others idiosyncrasies and because of their prior relationship there is a higher probability of getting the loan closed with a mortgage broker than by you going directly to the same lender.
  
  
• There are times in the loan process where you need someone to be your advocate, someone who strenuously defends your best interests. This can best be accomplished by a mortgage broker who has an established relationship with the lender.
  
  The lender’s loan officer inadequately fills this role as they work for the lender. They are being paid by the lender. Whose best interest do you think they are looking after?
  

The disadvantage of this option is that it may cost you an additional fee or a slightly higher interest rate for using the services of a mortgage broker, but it may not. It just depends on the lender.

If you decide to use a mortgage broker I have these suggestions for you:

1. Do not interview residential mortgage brokers. Do not consider using the services of a residential mortgage broker as they do not have the expertise to finance commercial real estate.
   
   
2. Interview more than one commercial mortgage broker. Get two or three recommendations for commercial mortgage brokers to interview. Prepare several questions ahead of time.
   
   Through the course of the interview find out whether you can trust them, whether they are competent and whether they are likeable. Finish your interview with this question: How are you different than your competition? Then choose one, and only one.
   
   
3. Do not use more than one commercial mortgage broker. When a borrower uses the services of more than one mortgage broker without their knowledge, all trust between borrower and broker evaporates.
   
   If Mortgage Broker A calls their lending sources and finds out that Mortgage Broker B has already talked to one or more of their favorite lenders, do you think Mortgage Broker A is going to work as hard on this loan request? Not a chance.
   
   
4. Request a side-by-side comparison of loan quotes. A good mortgage broker will get you multiple quotes and then show them in a side-by-side comparison. At the top of the page will be Lender A, Lender B, Lender C, etc.
   
   Down the page will be all the loan parameters a borrower needs to know in order to make an informed decision, such as loan amount, interest rate, loan term, amortization, loan fee, other financing costs, type of prepayment penalty, cash required at closing or estimated cash back on a refinance, before and after tax cash-on-cash return, to name just a few.
   
   This side-by-side comparison of the loan quotes makes it much easier to choose the lender that best meets your particular needs.

Whichever of these three options you ultimately choose depends on which advantages and disadvantages are most important to you.

However, I firmly believe that a mortgage broker’s counsel can help a borrower avoid serious pitfalls when shopping for a loan.

A wise man once said, “Plans fail for lack of counsel, but with many advisers they succeed.” That is why an owner optimizes his chances of getting the best possible loan for his property when employing the services of a commercial mortgage broker.