Mortgage brokers are one of many sources of transactions. Two questions come up whenever I talk about them: “What’s the best way to approach them: letters, phone calls or what?” and “How does the broker handle the paperwork while we still get to do the deal?” Let’s take the second question first.
Who handles the paperwork
Remember that we don’t make loans. The loan is made between the property seller and the property buyer. For that to happen, someone has to prepare the note, the mortgage or deed of trust and the closing statement, arrange a title search, order title insurance and an appraisal, and so on. Pulling all of that together is called loan processing.
A mortgage broker’s office does some or all of this every day on its regular loans and charges the borrower a processing fee, and possibly points. That’s how the broker makes a living, so let the real estate transaction pay him in the ordinary way. That does three things: it lets him satisfy his customer (the real estate agent), it lets him do a deal he would otherwise lose, and it lets him make money, without you necessarily paying a finder’s fee.
You’ll probably know about the transaction ahead of time, but you must never take part in the loan process without a license.
How to approach a mortgage broker
Look at how standard lenders get brokers to sell their loan products. A lender rents a hotel conference room, mails invitations to the area’s mortgage brokers and gives a two- or three-hour presentation on its company and products, with brochures and an underwriting package. Then it assigns a territory rep, who calls on the brokers regularly and introduces new products to them and their loan officers. A well-publicized meeting can draw over a hundred brokers and staff.
If you make that kind of presentation, plan it carefully. It’s very hard to explain what you do in a group setting. The reaction tends to be: “What, you don’t loan money? Then what are we doing here?”
I prefer to meet the broker first and explain how we can help him close business a standard lender would turn down, and how that benefits him:
- He keeps his agents. If he can’t meet the financing needs of his real estate agent, that fickle agent will drop him and use someone else. He has to perform to keep that customer base.
- He gets paid now. Doing the transaction for you puts dollars in his pocket today.
Once he’s convinced, ask to present to his loan officers at their weekly sales meeting and show them the same benefits can be theirs.
Finally, make sure the receptionist knows you and what you do. If someone calls the mortgage company wanting to sell a mortgage, she might turn them away at the switchboard without the broker, or you, ever knowing.
Should the buyer get an option?
A note broker student of mine in Ohio called with a problem structuring a deal that would work for both her buyer and her seller. I structured a partial purchase that worked for everyone. Then her buyer wanted an option to buy an additional set of payments in the future. How should she put that option in the agreement with the buyer? My answer: you don’t!
Having the seller give the buyer an option isn’t what this business is about. You should earn a profit when each payment stream is purchased, not just once when the original deal goes together. To do that, put an option to buy the additional payments at the same price in your purchase agreement and in your assignment agreement with the seller. That puts you in control, because you own the option.
You can then offer your buyer a right of first refusal to buy the additional payments from you at the best price and terms then available. If you must give the buyer something, and I don’t think you do, this at least keeps you in the loop, so your buyer can’t go straight to your seller and buy the additional payments without your profit on the second purchase.
Always ask for the option
I had two partial purchases come to an end, and neither seller was going to sell me more payments. They didn’t need the money. Shame on me! Both were yielding me 30% or better, and I never asked the sellers to include an option in the original purchase agreement and assignment.
When you do the original transaction, the note seller is more open to selling you future payments than at any other time. It costs nothing to ask and nothing extra to put the clause in the paperwork. Failing to ask costs you a good income stream. Include a clause that says, approximately:
“The seller hereby grants the buyer the option to purchase an additional (number of payments) payments for the same price and under the same terms and conditions as the payments purchased herein, with the option to be exercisable upon completion of collecting the payments due herein.”
You may even want to draw up and record a separate option agreement and pay the seller $1 for the option. Have your attorney supply the exact wording. Whether you keep the note or resell it, it’s money in the bank.
