These skills enable brokers to estimate and analyze financial performance, return on investment and property value while negotiating deals more effectively. Quick calculations of the net operating income, the capitalization rate or the debt-service-coverage ratio, for instance, will enable the mortgage broker to demonstrate a higher level of professionalism to a potential client.

“There are about 25 commonly used financial ratios. Several of these are regularly employed when analyzing the performance of a potential commercial real estate investment.”

While these skills may be rudimentary for veterans of commercial real estate finance, those who are new to the business — or even a residential mortgage originator who dabbles in commercial deals — will need to immerse themselves in the basics. A solid grasp of accounting is useful when participating in this field.

Investment analysis

At the heart of financial analysis is an understanding of the financial ratios that measure the relationship between two or more components in a company’s financial statements. These ratios provide a way to track a property’s performance compared to industry standards, identify potential problems and offer a basic report card on management.

There are about 25 commonly used financial ratios. Several of these are regularly employed when analyzing the performance of a potential commercial real estate investment. The following list of terms is not all-inclusive but offers some key areas that can greatly benefit commercial mortgage brokers in their day-to-day business endeavors.

The objectives of financial statements are to provide information about the fiscal performance and changes in the financial position of an organization. This information is crucial when making business and investment decisions.

Financial information is presented in a standardized manner through a set of accounting rules and standards for financial reporting known as Generally Accepted Accounting Principles (GAAP). Much of the information about a company will be found in three common financial statements: the balance sheet, income statement and statement of cash flow.

Balance-sheet basics

The balance sheet is one of the most essential tools in the analysis process. It provides a detailed report of a company’s assets, liabilities and shareholder equity at a specific time, such as the end of the year.

This statement, however, does not show the trends playing out over a longer period of time. Consequently, the balance sheet should be compared with previous periods. By using financial ratios to examine the balance-sheet information, additional insights can be uncovered about a property’s financial condition.

The balance sheet places assets on the left side of the equation, with liabilities and shareholder equity on the right. The resulting equation is assets = liabilities + equity. The accounting equation can be read as assets – liabilities = equity.

The balance sheet is divided into current assets (converted into cash in one year) and long-term assets (converted into cash beyond one year). The accounts are arranged according to their liquidity and the ease with which the assets can be converted into cash.

A liability is any debt a company is obligated to pay. This may include debts to lenders and suppliers, rent and salaries. Long-term liabilities include the total amount of any debt due beyond one year. This will include all debt that’s amortized over a multiyear period.

Current liabilities include the portion of debt due within the next 12 months. As an example, if a company has nine years left on a mortgage for its office building, one year of this obligation is classified as a current liability and the remaining eight years as a long-term liability.

Digging deeper

Other aspects of the balance sheet include equity, which is the net asset value for the shareholders of a business. Net assets are the total assets minus liabilities.

Don’t overlook the balance-sheet footnotes. These offer information on assets, debts, accounts, contingent liabilities and background details to explain the financial numbers.

“These skills enable brokers to estimate and analyze financial performance, return on investment and property value while negotiating deals more effectively.”

An income statement is another essential part of reporting a company’s financial performance. The income statement shows the total income generated, all related expenses, and the resulting profit or loss during a particular period (such as a month, quarter or year). This statement provides insightful knowledge of a firm’s operations and performance in relation to prior periods and industry peers.

Also crucial is the cash-flow statement, which is a report that reflects the amount of cash a company generates from its ongoing operations. It might be the most valuable of all statements since it tracks cash flow through the business in three key ways: operations, investments and financing.

Measuring profitability

A key financial metric used to measure the profitability of an investment property is net operating income (NOI). It represents the income generated by the property after the operating expenses are subtracted. To calculate NOI for commercial real estate, subtract the property’s operating expenses from its gross rental income.

Operating expenses include property taxes, insurance, maintenance, repairs, utilities and property management fees. NOI is used by lenders to determine the maximum loan amount they’ll approve based on the property’s income-generating capacity. (In equation form, NOI = gross rental income – operating expenses.)

The debt-service-coverage ratio (DSCR) measures the cash flow available to service the property’s debt. It is calculated by dividing NOI by the annual debt-service payments. A property with NOI of $750,000 per year and debt service of $600,000 per year has a ratio of 1.25 (DSCR = net operating income / total debt service).

A DSCR of 1.0 means the property generates enough income to cover its debt obligation. A ratio of 1.25 or higher is normally considered an adequate ratio for commercial real estate investments.

Measuring risk

A property’s net operating income is also used to determine the capitalization rate, or cap rate, which measures the anticipated return on a property’s investment income. It is calculated by dividing the property’s NOI by its market value.

Take, for example, an investor who wants to purchase a shopping center that generates $375,000 in net operating income and is valued at $7.5 million. The formula is cap rate = net operating income / property value, which in this example would equal 5%. This means that the property generates a 5% return on investment based on its income.

An investor can also calculate property value based on a desired rate of return. Using a 5% cap rate, the value of the same shopping center can be estimated as follows: value = NOI / cap rate. In this case, the value equates to $7.5 million.

The cap rate is useful for comparing the relative values of different commercial properties. A higher cap rate generally indicates a higher return on investment, but it’s also typically associated with higher risk.

Measuring returns

Two more key terms to remember are return on investment (ROI) and cash-on-cash (CoC) return. ROI is used to measure the profitability of an investment. It is determined by dividing the net income by the total amount invested. The higher the ROI, the better the deal for the owner.

Finally, to measure the cash income earned from invested capital, a broker can use the cash-on-cash return. CoC is calculated by dividing a property’s annual pretax cash flow by the total cash invested.

For instance, let’s say an apartment building costs $7 million with a $1 million downpayment. The building generates $150,000 in annual pretax revenue, so the CoC return is $150,000 divided by $1 million, which equals 15%.

The CoC return means that the cash income earned on the building is 15% per year. Once again, the higher the return, the better the investment.

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The various ratios discussed here are important tools for analyzing the financial performance of commercial real estate. Like all tools, however, there are limitations. They are often based on past performance, may lack comparable data and may not offer enough information to identify an emerging trend. They also don’t reveal all of the relevant information about a company’s past, present or future.

Successful commercial mortgage brokers will use these tools and more to analyze a client’s investment prospects. Brokers need to understand a property’s history and be able to speak the language of financial analysis in the business environment. In other words, to know your numbers is to know your business. ●

The post Know Your Numbers appeared first on Scotsman Guide.

“Lenders, brokers and third-party processors must work in harmony, leveraging each other’s strengths to fortify the industry against emerging challenges.”

The mortgage industry has a rich history of weathering economic storms, regulatory changes and market fluctuations. But today’s rapidly changing landscape demands more resilience than ever. This calls for a tactful approach to navigate not only the predictable market cycles but also potential shocks like global financial crises or unforeseen natural disasters.

At such times, building a robust foundation is a must. A strong foundation can withstand the tremors of change while committing to provide access to homeownership opportunities for individuals and families. Efficient processing solutions can be instrumental in strengthening your foundation and helping you effectively navigate the mortgage market.

Client satisfaction

Mortgage processing is a labor-intensive and time-consuming process. From application compilation, document verification, appraisal and property review to underwriting analysis, title examination, conditions fulfillment and final approval, there are numerous steps involved. For an organization looking to increase efficiency without hiring more staff and adding more resources to streamline the process, partnering with a third-party provider can be vital.

Third-party mortgage processing companies are the unsung heroes of mortgage businesses trying to reduce costs and optimize operations. Their expertise and services play a pivotal role in supporting lenders and originators, ultimately contributing to the industry’s stability. According to a 2019 McKinsey & Co. survey, only 42% to 67% of borrowers express satisfaction with the mortgage process, with banks often trailing behind nonbank lenders by 10 to 20 percentage points.

Why do you need to care about borrower satisfaction? The short answer is to gain more clients. The better the experience you’re able to offer your clients, the more likely they are to recommend you. Partnering with a third-party processor can enable you to focus on strengthening your customer relationships while they take care of your daily operations.

Streamline operations

Efficiency and speed are two cornerstones of an agile mortgage industry. Mortgage processing companies excel in helping lenders and brokers streamline their operations. By leveraging the latest tools like business intelligence dashboards and a dedicated workforce, these companies can significantly reduce the time it takes to process mortgages.

Let’s say you process roughly four loans a month given how much time processing requires. When you work with a processing company, you can work on at least six or seven loans a month because your paperwork is being taken care of while you secure more business. Quicker loan processing times not only lead to improved borrower satisfaction but also make the industry more resilient in a competitive market.

In a rapidly changing environment, borrowers and loan originators alike demand a mortgage process that keeps pace with their expectations. Third-party mortgage processing allows lenders to meet these demands head-on, gaining a competitive edge and fortifying their position in the market.

Cost-effectiveness is another area where third-party mortgage processing companies shine, particularly during challenging economic conditions. In times of economic uncertainty, lenders must closely monitor their expenses to ensure long-term stability. Outsourcing mortgage processing can be a strategic move in this regard.

By partnering with third-party processors, lenders can access cost-effective solutions that minimize overhead costs associated with in-house processing. For instance, an experienced mortgage processing partner would know the importance of reauditing loan documents. Identifying and rectifying errors after an audit can potentially increase gross margins and profits by reducing the risk of investor suspensions and repurchases.

Specialized expertise

The ever-evolving regulatory landscape presents a significant challenge for mortgage lenders and brokers. It is a processing provider’s responsibility to ensure compliance with a complex web of solutions. Third-party mortgage processing companies excel in this area by offering specialized expertise in compliance and risk management.

These companies invest heavily in staying up to date with regulatory changes, ensuring that their lender and broker partners always remain compliant. By mitigating potential risks and facilitating adherence to regulations, third-party processors shield against legal and financial threats. This allows for more stable operations by minimizing disruptions caused by regulatory noncompliance.

“For an organization looking to increase efficiency without hiring more staff and adding more resources to streamline the process, partnering with a third-party provider can be vital.”

Market conditions can be unpredictable with fluctuating lending volumes. By outsourcing processing tasks, loan originators can quickly adapt to market fluctuations without the need for extensive internal restructuring. In situations when the Federal Reserve increases interest rates to meet its inflation targets or when the unemployment report presents discouraging numbers, the housing market feels the heat. Third-party processors can seamlessly adjust their services to meet their clients’ needs.

In the age of data, the ability to harness information for smarter decisionmaking is paramount. Many third-party mortgage processing companies offer advanced data analytics and reporting capabilities like credit risk assessment, loan origination analysis and market research, to name a few. Lenders can gain valuable insights into their operations and portfolio performance, helping them make data-driven decisions.

These insights enable lenders to identify areas for improvement, optimize their processes and proactively address potential issues. In doing so, they can stay ahead of challenges rather than merely reacting to them.

Collaborative efforts

Looking ahead, it is increasingly evident that the mortgage industry’s resilience will hinge upon the strength of its collaborative efforts. The partnership between third-party processing companies and industry professionals will play a pivotal role in shaping the mortgage ecosystem of the future.

Collaboration is the bedrock upon which industry resilience is built. Lenders, brokers and third-party processors must work in harmony, leveraging each other’s strengths to fortify the industry against emerging challenges. This symbiotic relationship can result in a seamless mortgage process that not only meets but exceeds borrower expectations.

The role of third-party mortgage processing companies is poised to evolve further, becoming even more adaptive and responsive to industry needs. Their ability to rapidly adapt to the latest tools and processes, regulatory changes and market dynamics will be a critical asset in future-proofing the mortgage industry.

The outlook for the industry is bright if lending professionals recognize the vital role of collaboration and embrace the evolving capabilities of third-party processing companies. Together, they can build a resilient mortgage ecosystem that not only withstands the tests of time but also paves the way for continued growth and innovation. ●

The post These Unsung Mortgage Heroes Can Reduce Costs appeared first on Scotsman Guide.

Today’s digital landscape has created a particular expectation among consumers regarding their interactions with businesses and industries. Many modern consumers expect secure, seamless and streamlined lending experiences. This is especially true when consumers are being asked for personal data such as income and employment information.

Unfortunately, these consumer expectations are not always met. Some financial institutions utilize income- and employment-verification methods that can prolong the process. This can consume excessive amounts of time and require the consumer to be directly involved in the verification process.

Bank transaction data, user-provided payroll credentials, and paper pay stubs and W-2s are all forms of data that can be used for verifying income and employment. A loan, however, is placed on hold until all verification requirements are completed. The estimated time to return this data to mortgage lenders — and the originators who work with them — can sometimes be days, depending on the borrower’s completion rate and participation.

Faster decisions

Borrowers and lenders should consider leveraging solutions that offer seamless income and employment verification. Utilizing automated digital verification solutions allows for faster lending decisions than with other verification methods, creating an easier verification process for borrowers and lenders.

One significant advantage of instant verification is that it does not require clients to provide private bank account credentials, or to create separate accounts and manage the process themselves. It also lessens the time it takes for lenders to obtain copies of necessary documents.

Under the Fair Credit Reporting Act, lenders must have what is called a “permissible purpose” to obtain employment information. Additionally, consumers can give lenders permission to obtain income information concurrently with their loan application. This means that mortgage lenders can pull an automated employment or income report with little hassle for the borrower or their company.

Tedious tasks

Generally, financial institutions have had preferred ways of managing requests to verify an individual’s employment or income. A lender may handle these requests directly or turn to third-party applications for verifications.

These third-party application processes may require more steps than are necessary in the instant verification process. For example, both bank transaction data and consumer credentialed data ask for consumers to permit access to data at the time of loan application. Consumers are then prompted to access third-party applications to search and link to their financial institution. This may pose several challenges and potential risks.

Third-party applications often ask consumers to provide a username, password or even their bank account number. Following loan approval, these applications may continue pulling and sharing data for both the consumer and the financial institution, unless the consumer proactively revokes access to their bank accounts, which can be burdensome. When working with third-party applications, consumers may not be able to identify exactly what data within their account was accessed.

Granting access to consumer data in this way can be a security risk, especially if consumers share their login credentials for a bank or payroll account. It also makes clients take a more active role in the verification process by making it mandatory for consumers to set up a separate account within a third-party platform.

Employer- or employee-provided verifications also run into several issues. Employers, in some cases, might manage employee requests for verifying income and employment. If an employee decides to apply for a loan, a lender might have to request proof of employment or income directly from an employer. This could lead to a stalled verification process if an employer does not respond immediately to the verification request. Similarly, when employees are responsible for handling their own verification requests, the manual processes can become tedious, especially if an employee must gather proof of employment, or proof of income from pay stubs, W-2s or tax returns.

●●●

Instant and trusted employment and income verification can help a mortgage lender receive timely and up-to-date information. In today’s digital world, lenders should take full advantage of solutions that streamline the decisionmaking process, mitigate risk, and provide borrowers with a faster and more frictionless verification process. ●

The post Remove the Roadblocks for Verifying Income appeared first on Scotsman Guide.

“Aggregate costs serve as the structural foundation upon which a project is built, but they also serve as a financial foundation for how budgets are built.”

Having a firm grasp on the aggregate costs and their influence on construction financing will give commercial mortgage brokers a realistic idea of how much money borrowers will need to complete their projects. When embarking on a project, it’s essential to consider all the expenses that fall under the umbrella of aggregate costs. These include direct and indirect construction costs.

Thorough understanding

Direct construction costs encompass the expenses directly associated with the physical construction of real estate assets. These include materials, labor, equipment and any other resources required to bring the project to life. It is vital to carefully analyze these costs to ensure accurate budgeting and avoid any financial surprises that may arise during the construction process.

It is equally important, however, to consider the indirect costs that are often overlooked but can significantly impact the project’s budget. Pre-construction planning, project permits, legal fees, insurance and licenses are necessary for compliance and approval from local authorities.

Each of these components plays a pivotal role in the successful completion of the project and the overall financial health of the stakeholders involved. These costs can vary depending on the project’s location, size and complexity. It is crucial for mortgage brokers to make sure that the necessary funds are allocated for permits, to avoid delays and legal complications that may arise if proper documentation is not in place.

Construction projects often involve complex legal contracts, negotiations and documentation. Hiring legal counsel to navigate these intricacies is essential to protect the interests of all parties involved. These fees can also vary depending on the scope of the project.

Insurance is yet another vital component of aggregate costs in construction financing. Ground-up development projects are inherently risky, with various potential hazards and unforeseen circumstances that may arise. Adequate insurance coverage is necessary to protect against these risks and provide financial security in case of accidents, property damage or other unforeseen events.

Look closely

By considering these expenditures, commercial mortgage borrowers and their broker partners can form a comprehensive budget that reflects the true scope of the project. This ensures that the project’s financing needs align with the actual costs involved, reducing the risk of budget shortfalls and financial strain throughout the construction process.

Lenders also play a crucial role in construction financing by analyzing aggregate costs. Lenders carefully evaluate the financial feasibility of a construction project before approving financing. By understanding the complete financial picture, lenders can assess the level of risk associated with the real estate project and determine the appropriate loan size.

Aggregate costs serve as the structural foundation upon which a project is built, but they also serve as a financial foundation for how budgets are built. By meticulously calculating all the expenses, brokers and borrowers can have a realistic understanding of what it will take to bring the owner’s vision to life. Skimping on this crucial phase can potentially lead to financial trouble down the road.

For instance, the cost of materials can vary significantly depending on the type and quality required for the project. Can this project use recycled materials? How far is the nearest quarry or gravel yard? How soon can the materials be delivered? These are all questions that must be considered.

Project owners must research suppliers, compare prices and factor in potential price fluctuations to accurately estimate these components. Similarly, labor costs need to be carefully assessed by considering factors such as wages, overtime and any specialized skills required for the project.

Lender scrutiny

Lenders will also closely scrutinize these costs to ensure that the loan amount aligns with the project’s financial requirements. If the aggregate costs exceed the loan amount, project owners may have to secure additional funding or reconsider certain aspects of the project to maintain financial viability.

Brokers and borrowers need to present a comprehensive and well-researched budget to lenders when seeking financing. This includes providing detailed breakdowns of the aggregate costs, along with supporting documentation and estimates from reputable sources. Lenders need to have confidence in the accuracy and feasibility of the budget before approving a loan.

Moreover, they must consider the potential impact of inflation and market fluctuations on aggregate costs. These factors can significantly affect the overall budget and loan size. Therefore, it’s essential to regularly review and update the budget throughout the project’s life cycle to account for any changes in costs.

There are also risks associated with underestimating aggregate costs. If the project experiences unexpected expenses or cost overruns, it could lead to financial strain and potential delays. Therefore, it is advisable to include contingency funds within the budget to mitigate any unforeseen circumstances that may arise.

Lender considerations

As mortgage brokers work with clients to evaluate potential loan options for their construction projects, it is paramount to consider how aggregate expenses impact the financing landscape. Different lenders have varying criteria for evaluating loan requests and consider a range of factors such as creditworthiness, project feasibility and, most importantly, aggregate costs.

Project owners must thoroughly understand how lenders assess aggregate expenses to present a well-informed loan proposal. This understanding allows project owners to demonstrate their ability to manage financial risk effectively and increases their chances of obtaining financing. By aligning the loan scope with the aggregate expenses, borrowers can show lenders that they have a comprehensive understanding of the project’s financial requirements.

One key aspect that lenders consider when evaluating aggregate expenses is the breakdown of costs. Lenders want to see a detailed breakdown of each expense category, including an itemized list of materials, labor rates and other associated costs. This level of detail allows lenders to assess the accuracy and feasibility of the estimated expenses.

They will also examine the project’s timeline and schedule when evaluating aggregate expenses. Construction projects often have specific timelines and deadlines, and lenders want to ensure that the loan amount is sufficient to cover the expenses within the given time frame. Lenders may also evaluate the project owner’s track record and experience in managing construction projects. Lenders want to see evidence of the developer’s ability to effectively manage costs so that projects are delivered on time and on budget.

Understanding how lenders assess aggregate expenses can be crucial for project owners seeking construction financing. By offering a comprehensive and compelling loan proposal that covers all the bases, mortgage brokers and borrowers increase their chances of obtaining financing and securing the necessary resources for successful completion.

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Aggregate costs play a primary role in calculating commercial real estate project budgets and determining loan sizes in construction financing. By bolstering their knowledge and awareness of these financial dynamics, mortgage brokers and project owners can navigate the intricacies of construction financing with confidence, allowing them to make informed decisions, increase their chances of financing approval and realize successful construction projects. ●

The post The Project Must Pencil Out appeared first on Scotsman Guide.

In Episode 010 of the Scotsman Guide Author Showcase, Carl White interviews Rob Finlay about his article, “Sharpening the Technology Edge,” in the August 2023 issue of Scotsman Guide Commercial Edition.

Rob Finlay is founder and CEO of Thirty Capital, an advisory, investment and technology firm serving growth-minded real estate operators and investors. He is a forward-thinking entrepreneur devoted to building companies that support and advance the commercial real estate industry. Finlay has expertise in tech-enabled asset management and capital markets services and solutions. He recently authored the book “Beyond the Building,” an operator’s guide to building a competitive advantage through innovation. Visit robfinlay.com, or connect with him on LinkedIn.

The post Author Showcase: Rob Finlay, Thirty Capital appeared first on Scotsman Guide.

With the rise of the gig economy and an increasing number of people starting their own businesses, originators shouldn’t overlook this group of clients who are looking to purchase homes. It’s important to understand the right approach and best practices for helping these entrepreneurial clients achieve their homeownership dreams.

Financial details

The first step in working with these clients is to understand their unique financial situations. Self-employed borrowers may have fluctuating income or may write off expenses on their tax returns, which can lower their taxable income.

As a mortgage originator, it’s important to understand the applicant’s business model and how they generate revenue to accurately determine their qualifying income. Then you can work with an underwriter to find out if they’ll consider any add-backs for a wide range of business expenses.

“If you have any questions about the client’s tax returns, don’t hesitate to ask for clarification. You’re there for guidance.”

Traditional W-2 employees, depending on their employer, generally have consistent levels of income over time. On the other hand, self-employed individuals may have varying levels of income from year to year, or within the same year, which can pose challenges in qualifying for a mortgage.

If the applicant doesn’t have a regular paycheck coming in each month, it can be difficult for a lender to verify how much money they make, available savings for a downpayment and any necessary cash reserves. As their originator, it is your responsibility to gather as much information as possible about your client’s finances and income (both personal and business) to best serve their needs.

Another major consideration is the borrower’s debt-to-income (DTI) ratio. For self-employed workers, calculating the DTI can be more complicated than it is for traditional W-2 employees. Originators need to ensure their borrower’s DTI is within acceptable limits of the loan program in question. Lenders typically prefer a DTI of no more than 43%, although some may be willing to go higher. If the DTI doesn’t fall where it should, encourage the client to lower the ratio by paying off debts, reducing expenses or increasing their income by writing off fewer expenses.

“Make sure your clients know that credit-building best practices are critical in qualifying for a mortgage that best fits their circumstances.”

One of the best ways to understand a self-employed borrower’s financial situation is to review their tax returns. These provide a wealth of information about an individual’s income, expenses and overall financial health. It’s wise for originators and borrowers to sit down and carefully review these items together. Look for any inconsistencies or red flags that may impact their ability to qualify for a mortgage. If you have any questions about the client’s tax returns, don’t hesitate to ask for clarification. You’re there for guidance.

Proper documentation

Another key factor in understanding your self-employed borrower’s financial situation is to have proper documentation. Entrepreneurs are required to provide more documentation than W-2 wage earners.

They’ll need to provide past tax returns (such as K-1 forms), profit-and-loss statements, balance sheets and bank statements. Additionally, a lender may require some or all of the following information:

• Business debts and monthly payment amounts
• Assets such as savings and investment accounts
• Additional sources of income (alimony, Social Security, etc.)
• Evidence of their business entity or self-employment status (business license, client testimonials, accountant statements, etc.)
• Evidence of recent mortgage or rent payments

Encourage your self-employed borrowers to keep accurate records of their income and expenses. Keeping detailed records helps these clients qualify for the right mortgage and makes the homebuying process smoother.

As their originator, it’s helpful to provide your clients with resources and tools to help them track their finances. For example, you might recommend they use accounting software or work with a financial planner to manage their finances effectively. This also applies to helping them improve their DTI ratio.

Credit scores

Along with understanding your client’s financial situation and having the correct documentation, it’s critical to help them improve their credit score. A borrower’s credit score is important for any loan application, but it’s especially important for those who are self-employed. A solid credit score can help offset any concerns about fluctuating income or tax returns with write-offs.

A strong score is also essential for locking in the best interest rate, but it can be more challenging for entrepreneurs to build their credit than it is for traditional W-2 employees. You should work with your clients to help them build their credit. Have they established their business credit? Do they pay their bills on time? Have they taken on too much debt?

Make sure your clients know that credit-building best practices are critical in qualifying for a mortgage that best fits their circumstances. It’s also helpful for brokers in building strong relationships with lenders. Even if a borrower already has a good score, it doesn’t hurt to encourage them to keep at it. Reinforce the fact that consistently paying their bills on time, keeping their credit utilization low and monitoring their credit report will help to boost their score.

Loan types

There are many types of mortgages available. It’s important to help your self-employed clients choose the right type to fit their needs.

Some self-employed borrowers may benefit from a fixed-rate loan, which offers consistent monthly payments and a stable interest rate (for those with a more stable income). Other borrowers, however, may prefer an adjustable-rate mortgage, which has a lower initial interest rate but is likely to fluctuate over time.

Additionally, some borrowers may benefit from a government-backed mortgage from the Federal Housing Administration or the U.S. Department of Veterans Affairs. These loans have more flexible requirements and lower downpayment barriers, which can make them attractive options for entrepreneurial types who may not qualify for conventional mortgages.

It’s important to note, however, that government-backed mortgages may have additional fees and requirements, such as mortgage insurance premiums. It’s crucial for originators to help their clients understand the pros and cons of each type of loan, then choose the smartest option for their needs.

● ● ●

Working with self-employed borrowers can be more difficult than working with W-2 wage earners. But by understanding their financial situation, organizing the proper documentation, reviewing their credit scores and explaining the different types of mortgages that can work for their circumstances, you can help them qualify for financing and navigate the daunting home purchase process.

The bonus comes in the form of winning a lifelong client. By offering excellent service and advice, you’ll not only help these people achieve their homeownership dreams, you’ll also build long-lasting relationships with them as a trusted loan adviser. ●

The post Dig Deep Into the Details appeared first on Scotsman Guide.

When evaluating a potential borrower or supporting a current lender, mortgage brokers who offer advice on leveraging widely available and cost-efficient technology can help ensure their ability to meet debt-service requirements and contribute to a lower lending risk. For instance, there are technologies and strategies to monitor, control and optimize operating expenses. These include tracking of property costs, management of building maintenance and improvements, and optimization of energy and water consumption.

“Asset, data and project management platforms can be used to automate tasks, help team members interact seamlessly and find important information quickly.”

Commercial mortgage originators can reduce lending risks, avoid bad deals, support the success of their clients and build lifelong relationships. This is possible by evaluating and advising new and repeat borrowers on tech-enabled strategies to control expenses and increase positive leverage.

Tracking and benchmarking

When values are rising and rent growth is strong, owners don’t have to work too hard to generate margins, deliver returns and keep their leverage positive. Fast forward to today as interest rates are well above the historic lows of 2021. Capitalization rates are rising and pushing down valuations as rent growth has cooled.

At the same time, inflation has slowed but is still swelling. This translates into higher operating costs, higher vacancy rates and more competition for tenants, as well as additional pressure on purchase, development and refinance candidates.

Property owners must be more mindful and proactive in controlling and optimizing expenses to stay in the black. To accomplish this, they must first develop an awareness of cash inflows and outflows. Once expenses are known, asset operators need a basis of comparison to determine if and by how much expenses exceed the norm. In other words, how do their properties compare to similar types of assets? These are two purposes for which technology creates cost and time efficiencies.

“The ability to ensure that a commercial real estate company remains a leader over the long term by leveraging innovation throughout its project life cycles assures growth and solvency well into the future.”

Web-based data management software can collect expense and income data from assets across a portfolio. Some specialized platforms also integrate external benchmark data to provide operators with dashboards that display expense data by category. This allows borrowers to compare their assets side by side with data for comparable assets. This insight and frame of reference allows operators to pinpoint where expenses need to be optimized and by how much. Budget or labor cuts can be arbitrary without data to inform decisions, and they may not produce the intended outcome.

Integrative technology isn’t mandatory. After all, an operator could have each property management team assemble and submit data via spreadsheet or PDF. But the unnecessary labor expense and delayed information can hinder a property owner’s profits, margins, situational awareness and ability to make timely decisions.

Mortgage originators need to explain to clients that a commitment to innovation as a value proposition is a major draw for investors and tenants. The ability to ensure that a commercial real estate company remains a leader over the long term by leveraging innovation throughout its project life cycles assures growth and solvency well into the future.

Automating processes

Management functions are typically significant expenses for commercial real estate operators. The labor required to screen and interact with tenants, collect rents, prepare rent rolls, complete leases and maintain books adds up to a substantial amount of money and time. On top of these chores, staff must complete many other tasks, such as compliance, data collection, and analysis and reporting of results.

While no one is advocating for fewer jobs, technology offers the opportunity to streamline and automate many tasks that introduce bottlenecks and occupy staff members with busywork. Individual and organizational productivity improves when team members focus on work that more directly contributes to increasing revenue, such as sourcing acquisition opportunities, improving tenant satisfaction, strategic marketing and more.

When a property company can use enhanced productivity and efficiency to scale up, more work opportunities are created for the community. Asset, data and project management platforms can be used to automate tasks, help team members interact seamlessly and find important information quickly. The technology can also help organize their efforts, bolstering productivity and generating greater net operating income.

Managing the property

Keeping facilities energy efficient and in top condition are additional areas where technology offers support. On the front end of the development cycle, as well as when planning improvements, software programs such as building information modeling (BIM) can be used. This modeling tool helps stakeholders visualize various aspects of the future project, including everything from how the building will operate, serve users, and consume energy and water.

When the project is complete, facilities management (FM) platforms help track utility usage, user behavior and maintenance requests. Automated building data collection, monitoring and reporting — as well as online tools where tenants can self-schedule service requests — help management and maintenance staffs work more quickly, understand property conditions in real time and control costs.

Mortgage brokers can show clients how BIM and FM, in conjunction with asset and data management systems, provide greater perceived and actual value to stakeholders. This is particularly true of tenants and lenders that appreciate transparency, up-to-date insights, convenience and pass-through value.

New systems can be installed to minimize waste and long-term operating costs for newly constructed, renovated and redeveloped assets. Utilizing sustainable building materials and design strategies can also contribute to reducing water and energy consumption. Moreover, sustainable design technology promotes healthy building conditions, such as air quality and thermal comfort. These factors promote physical and mental well-being that fosters tenant loyalty, top-of-market rents, low vacancies and community goodwill.

A big plus provided by sustainable technology on a project’s maintenance side is durability. Part of what makes a material or design approach “green” is the capacity of the finished product to withstand years of wear and tear due to typical usage and environmental conditions. Leveraging durable materials significantly reduces planned and unexpected capital expenditures while extending the project’s useful life and marketability, including its appeal and demand.

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In the current economic environment, it’s prudent and crucial to survival for commercial mortgage borrowers to leverage the most innovative technology available to maximize profits and keep a competitive edge. As the competition for tenants gets tougher due to ample inventories of vacant space and downward rent pressures, owners and operators must concentrate on efficiency and optimization to meet the repayment expectations of lenders and investors. Mortgage originators can help clients find success in the current commercial real estate environment by advising them on the potential and promise to be found in the latest technology advancements surrounding automation and property management. ●

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In Episode 007 of the Scotsman Guide Author Showcase, Carl White interviews Rachael Sokolowski of Magnolia Technologies LLC about her article, “The Promise of AI,” in the July 2023 issue of Scotsman Guide Commercial Edition.

Rachael Sokolowski is president of Magnolia Technologies LLC. She is a recognized leader, technology evangelist, trusted adviser and author in the mortgage banking industry. Sokolowski is currently co-chair of the MISMO eMortgage Community of Practice and is certified by MISMO as a Mortgage Standards Professional (CMSP). In 2016, Sokolowski received the MISMO Chairman’s Award and was named by Mortgage Women Magazine as a technology leader and entrepreneur in the industry.

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We don’t know the answers to these questions just yet, but evolution appears to be occurring quickly. There has already been a frenzy of media attention surrounding AI that has helped students write academic papers, has created photos and songs that mimic the styles of famous artists, and has the ability to answer your questions in a conversational format.

“AI systems will raise concerns about privacy, along with the potential for the data to be misused or shared without consent.”

To better understand the real-world capabilities of this next-generation technology, ChatGPT was consulted with the following question: Is AI the real thing or a wizard behind a curtain? The system took some time to generate a response, but that may have been because the free version was used.

Here is ChatGPT’s answer: “The idea of AI being a wizard behind a curtain is a metaphorical reference to the Wizard of Oz, a powerful being hiding behind a curtain and manipulating events from behind the scenes. While AI can certainly be a powerful tool that can impact many aspects of our lives, it is not inherently mysterious or manipulative. AI is a field of computer science that focuses on developing algorithms and systems that can perform tasks that typically require human-like intelligence, such as recognizing speech, images, or patterns in data.

“AI systems are designed and developed by teams of engineers, researchers and data scientists who work to create systems that can learn, adapt and make decisions based on data and experience. While AI has the potential to transform many industries and aspects of our lives, it is ultimately a tool that is created and controlled by humans. It is not an all-powerful being that can control events from behind the scenes.”

A powerful tool

With the potential for AI to be a powerful new tool, how will the commercial mortgage and real estate industries use it? History may provide some answers.

More than 60 years ago, a crude form of a new technology was pioneered that allowed users to organize information, perform calculations and analyze data in a computerized table format. It might be hard to remember that far back, but when spreadsheet applications were introduced, many wondered if their jobs would become obsolete.

Rather than eliminating jobs, spreadsheets automated repetitive tasks, performed complex financial analyses and empowered data-driven decisions. Spreadsheets are commonly used in the commercial mortgage process and across many other business tasks. The technology may have eliminated some low-level jobs, but it also freed workers from the drudgery of data-intensive and time-consuming tasks.

In recent years, the potential of big data captivated the technology industry with its ability to create large and complex data sets from various sources, including social media, scientific research and business transactions. One of the main promises of big data is that it can be analyzed to reveal insights, trends and patterns that were not previously apparent.

By using AI technology, these analyses are now possible through machine learning algorithms, which can recognize patterns across various media such as text, images and videos. Once patterns are recognized, AI systems can make rule-based decisions based on the data. Combined with natural language processing technology, AI can interpret, understand and generate human language.

For the commercial mortgage industry, this has profound implications. AI has the potential to automate the analysis of narrative text in loan documents, thereby saving valuable time that people can allocate to more complex and strategic tasks. This technological advancement can make the industry more efficient and facilitate higher-level decisionmaking.

On the market

There are companies using AI technologies in commercial real estate today. To enable collaboration during the construction process, OpenSpace uses 360-degree cameras and computer vision to create digital replicas of construction sites. These videos capture a record of the construction project, allowing teams to remotely monitor and document progress. This saves time and money for travel and prevents budget overruns due to change orders.

CompStak uses AI technology to collect and analyze large amounts of data from a variety of sources (leasing brokers, property owners, public land records, etc.) and subsequently provide analyses of commercial properties, leases and sales. By identifying patterns and trends in the data, users can have deeper insights about potential risks and opportunities.

Similarly, Skyline AI (which was acquired nearly two years ago by JLL) is a platform that analyzes commercial property data to predict investment opportunities. The system collects and analyzes data from financial statements, tenant information, property values and other sources. The platform then utilizes machine learning algorithms to identify properties that are likely to generate strong returns, thereby enabling investors to make well-informed decisions.

Future transformation

How might AI transform the industry in the future? Digitizing loans is a challenge today as a commercial mortgage deal can include hundreds of pages of documents. Sorting, organizing and maintaining different versions of these documents are manual tasks.

AI could be used to automatically classify and sort loan documents by type, such as tax returns, rent rolls, financial statements and correspondence. Natural language processing may help accelerate the digital transformation of the data and documents by analyzing and identifying common patterns, structures and relationships in existing loan documents.

Key data, such as loan amounts, interest rates, repayment terms and collateral information, could be extracted in a standardized manner. Once extracted, the data could be checked for inconsistencies across the various documents. Additionally, by analyzing the language in the loan agreements referenced in the promissory note, AI could identify potential inconsistencies with representations and warranties, default provisions, lease expirations and payment schedules.

The right data

For AI to be accurate, it needs a large and diverse set of data that is representative of the types of necessary documents. In commercial real estate, this would include loan applications, financial statements, appraisal reports, sales agreements and more. These documents also have a varied narrative language.

For instance, a promissory note might contain the language, “For value received, the undersigned (whether one or more, “borrower”) promises to pay to XYZ Bank (“bank”) the sum of three million and no/100 dollars ($3,000,000.00).” Another promissory note might read, “In return for a loan that I have received, I promise to pay U.S. $3,000,000.00 (this amount called “principal”) plus interest, to the lender, XYZ Bank.” After analyzing the documents and accounting for the variability in the narrative text, AI could extract key pieces of information and other relevant details, such as in the example above: the lender’s name as “XYZ Bank” and the loan amount as “$3,000,000.”

To accelerate the digitization of commercial mortgages, AI could analyze documents to generate uniform templates for different types of documents, such as loan agreements, promissory notes and security agreements. With the import of standardized data, AI algorithms could automatically prepare loan documents by having previously identified where data is in the text. The algorithms could be customized for borrower- or loan-specific information.

A borrower’s financial information could be used to generate specific loan covenants or clauses. Machine learning rules may include specific regulatory or legal requirements such as zoning restrictions, environmental regulations and land-use laws. Using AI technology to translate loan data and documents could increase efficiency, reduce costs and improve accuracy.

Future challenges

Introducing a new technology has potential benefits but also brings challenges. AI systems will raise concerns about privacy, along with the potential for the data to be misused or shared without consent.

As with any technology, AI systems are vulnerable to cyberattacks that could further compromise sensitive information. AI needs safeguards to ensure that the technology is used in ethical and responsible ways. AI systems are only as good as the data on which they are trained. So, if the data is biased or incomplete, the results generated by the AI will also be biased or incomplete.

Additionally, users need to understand that AI algorithms may produce unexpected or undesired results. It is important for technology solution providers and lenders to be alerted to these potential issues and take steps to mitigate them. A review by humans, not robots, will be necessary at every stage of development and use.

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It’s going to take time, but AI may become a revolutionary business tool that will automate repetitive tasks while enabling faster and more accurate decisionmaking. We are off to see the wizard, but this may be a very long yellow brick road to the Emerald City.

This journey will take the commercial mortgage industry to some new and unfamiliar places that may even be a little scary. There are challenges to using AI, but there also are many potential automations and outcomes that have yet to be imagined. Toto, it feels like we’re not in Kansas anymore. ●

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For Express loan sizes of less than $350,000, the SBA does not require that the lender underwrite financial statements or tax returns.

Smaller and faster

Extensive rules

Experienced lenders

• A business credit score that is 700 or higher
• An operating history of at least two years
• Filing of all required tax returns
• No history of late payments, defaults, bankruptcies or foreclosures

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