Oh to have a nickle for everyone who has complained through the years about underwriting and underwriters. I could definitely get that Mocha Chip Venti with a double-shot to be sure! Commercial real estate loan and investment underwriting involves the weighing of risks. In many cases, the underwriter will never meet the sponsor, so what they receive is what they use to make a judgment about whether the sponsor is going to be able to do their part. This is important to keep in mind when we go about reviewing the top complaints and how you can avoid the traps these complaints really point to in the underwriting process.
Underwriting Complaint #1: “The Underwriter Won’t Talk To Me Anymore…”
Commercial real estate finance firms only have the opportunity – not a guarantee, but an opportunity – to make money on transactions that actually close. The second the underwriter comes to the belief that there is less than a 75% chance of your transaction closing, the underwriter has to move on to the next deal. CRE finance firms routinely receive an avalanche of unsolicited proposals for financing and they all have to be reviewed. The first step is triage: which ones have a shot at making it. It is a brutal process and nit-picking is a big part of it. Any material representation of fact that contains hyperbole (e.g.: “best deal ever” or “greatest invention since sliced bread”) almost always leads to the recycling bin with no further action.
Other times, the underwriter has given up because the answer to the underwriter’s previous information production request is unanswered or incomplete and too much time has passed. Avoid this trap by providing timely answers and asking if the materials provided are in the proper form and have the content the underwriter requires. Just because you say the document is complete doesn’t mean anyone else is likely to agree to that premise. Remember: you have a conflict-of-interest, so what you say doesn’t carry much weight.
Underwriting Complaint #2: “When Will My Deal Close?”
The one complaint that is sure to trigger frustration and make the underwriter want to find a reason to say no. Transactions close once underwriting is complete, the investment committee says it is acceptable, and the funding source(s) provide the funding. That’s not an overnight process and constantly haranguing the underwriter about it won’t make it happen faster. Remember: get an agreed upon schedule for production of the due diligence documentation, an agreed upon schedule for review and then make allowances as some underwriters will take longer if they find something materially-significant that requires additional investigation.
Underwriting Complaint #3: “The Underwriter Isn’t Closing My Deal!”
Unlike consumer mortgage loans, commercial loans have different standards. You are holding yourself out as an expert in your own business worthy of capital investment. It is automatically assumed you know what you are doing and will provide everything required before it is even asked for. If you don’t provide what is required your transaction goes to the bottom of the pile or the trashcan. Either way, you are done. Remember: you have to be “shovel-ready” when you start the underwriting process. This means your project is ready to commence the required activities within 30 days of the date of funding and all of your due diligence documentation has to support this requirement. If not, you won’t close until you do.
In our next blog entry we will talk to you about how the other side sees these complaints.