Credit philosophy: The difference between lenders and investors

As a mortgage broker, I have the pleasure of seeing a wide variety of potential loan transactions. I used the word “potential” because not all work. In fact, there are quite a few turkeys with the swans!

A common scenario is a refinance or a purchase where the investor comes up to me with something like, “Man, this is the BEST property around, it’s worth $5 million, and I’m buying it for $3 million! I need a 90% loan and I need it NOW!” OK… so I just exaggerated a bit. In reality the value of the property will probably be fair market but I’ll still get the request for the high loan to value ratio.

Until recently, I probably could not have gotten a 90% loan on a commercial property, except in the limited case of a Small Business Administration guaranteed home loan. First, because no one has offered a 90% commercial real estate loan, and second, because the real estate most likely would not have supported the debt service.

The big change in this scenario has been the emergence of the “small commercial lender” in recent years. They combine commercial and private underwriting methods to achieve higher LTVs. I’ll save an article on this type of lender for later because I want to focus on why a traditional commercial lender doesn’t really care how well the investor is treating a particular property. This is because there is a very fundamental difference in philosophy between the lender and the investor.

An investor seeks to maximize the return on their equity. Whether it’s through leverage, adding value through improvements, or adding value by improving a property’s cash flow, the goal is to make as much money as possible from the investment. The return he receives corresponds to the risk he takes with his stock investment

A lender is concerned with something completely different: repayment! A lender also considers a loan an “investment”. In fact, in the lending business, we often call our lenders “investors.” But these investors approach their investment from the perspective of managing their risk in return for an acceptable return: the interest rate on the loan. The property, which the investor sees as a growing asset, the traditional lender sees solely as collateral for the loan. (Again, I’m not talking about private lenders who might have other motivations).

So if you hear an investor say something like, “I don’t understand why they didn’t give me the loan! The property is worth THAT much and they can always take it back if I don’t pay up!” Well the reality is the lender doesn’t want the property back… they just want their money back as agreed.