Loan Philosophy: The Difference Between Lenders and Investors

As a mortgage broker, I am pleased to see a large number of potential loan transactions. I used the word “potential” because not all of them work. Actually, there are quite a few turkeys with the swans!

A common scenario is a refinance or purchase where the investor comes to me with something like, “Man, this is the BEST property in the area, it’s worth $5 million, and I’ll buy it for $3 million! 90% loan and I need it NOW!” OK… so I’ve exaggerated a bit. In reality, the value of the property will probably be accurate to market, but I will still receive a loan application with a high value.

Until recently, you probably couldn’t have gotten a 90% loan on a commercial property, except in the limited case of a Small Business Administration-guaranteed acquisition loan. First, because no one offered a 90% loan on commercial property, and second, because the property probably would not have supported debt service.

The big change in that scenario has been the advent of the “small balance commercial lender” in recent years. They combine commercial and residential subscription methods to get higher LTVs. I’ll save an article on this type of lender for later because I want to focus on why a conventional commercial lender really doesn’t care how great a deal the investor is getting on a particular property. It is because there is a very basic difference in philosophy between the lender and the investor.

An investor is concerned with maximizing the return on his capital. Whether through leverage, adding value by making improvements, or adding value by improving a property’s cash flow, the goal is to make as much money as possible on the capital investment. The return you receive is proportional to the risk you take with your capital investment.

A lender is concerned with something entirely different: getting the money back! A lender also considers a loan to be an “investment.” In fact, in the lending business we often call our lenders “investors.” But these investors approach their investment from the point of view of managing their risk in exchange for an acceptable rate of return: the interest rate on the loan. The property that the investor sees as a growing asset, the conventional lender sees only as collateral for the loan. (Again, I’m not talking about private lenders who might have other motivations.)

So when you hear an investor say something like, “I don’t understand why they didn’t give me the loan! The property is worth A LOT and they can always get it back if I don’t pay!” Well, the reality is that the lender doesn’t want the property back…he just wants his money back, as agreed.

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