The video titled “Pro Guide To Commercial Mortgage Rates with Some Key Factors” by Gelt Financial, LLC discusses the factors involved in pricing a loan in the private lending space. It highlights factors such as loan type, risk level, loan size, credit risk, location, loan length, and the lender’s cost of capital. It emphasizes that loan pricing is not arbitrary and varies based on these factors:
Hi, I wanted to, you know, answer a question a lot of people think, and we think it all the time. You know, how do you price or how do you come up with pricing for a loan? You know, we’re in the private lending space. We focus on either deals that don’t have time to go to a bank or can’t go to a bank. Some of what we do is considered hard money; everyone has a different determination. So, I just want to walk you through some of what goes into the thinking of how we come up with a price for a loan. We just don’t arbitrarily pick a rate, you know, 10 and a half percent and 3 points, or 9 and a half percent and 2 points, or 12 and 3, or whatever it is. You know, there’s so many factors that go into it. It’s really complicated. Think about it if you are us, you know, first of all, you take what type of deal it is. So, is it a fix and flip, is it a foreclosure bailout, is it a debtor in possession, is it a traditional bridge loan? So, they’re all different things. Some people think, say, “Oh, they’re all hard money,” but they’re really not. They’re different profiles. So, the type of loan goes into it.
Self-understood, if it’s a bridge loan that is a bank fallout loan, it’s going to be priced. It has a different risk level than a foreclosure bailout loan, so you have to take that into consideration. So, that’s one factor, and there are so many factors I’m not going to talk about them all, I just can’t. But I just want to give you an idea. Another factor is the size of the loan. The reality is, it costs as much to service a loan and originate a loan for a $100,000 than it does for $2 million. So, you know, to be candid with you, if it’s a small deal, it’s priced more aggressive because there’s just a lot of work that goes into it. A lot of lenders don’t like small deals, so I get it. The small deals are more expensive, but again, it’s the same manpower hours for the amount of work. So, that’s another big factor that goes into it.
Another factor that goes into it, and I’m just going to go into a few of them, is the credit risk. You know, does the borrower have good credit? Does the borrower have bad credit? Do we think this is going to be a problem to service the loan? So, all these things go into it. States go into it. Where is it located? Is it an increasing population, a decreasing population? How hard is that state to deal with? How hard is that municipality to deal with? The time length of the loan, does the borrower want the loan for three months or three years? You know, we at Gelt Financial, we service our loans, and we keep them on our balance sheet. They stay with us. So, for us, the longer we have a loan, frankly, the more we make. So, if we have a loan, let’s say it’s the same loan that’s going to pay off in two months or, as opposed to three years, we look at it differently. So, there’s so many, so many factors that go into the loan, and there’s 20 more. It’s what we call risk-based pricing. So, we look at the total deal in totality, and we run some numbers, and we say, “Okay, this is what we need to make on it.”
Self-understood, I’m not even talking about the economy and as rates go up and our cost of capital and other opportunities. Other opportunities that if we place the money in A, you know, if we place it in B, we could earn a higher yield. But all these things go into the loan. You know, no two deals are alike. You know, generally, we’re right now in high single digits, low double digits. You know, but the economy, everything is always changing, and things change all the time. And a lot of it, frankly, has to do with our appetite. So, there’s so many factors that go into pricing alone. It’s not just so easy to say, “Oh, the loan is priced this way or it’s priced that way.” A broker may submit us a loan, and we may price it. Maybe it’s a foreclosure bailout, it’s a small loan. We may price it expensively. And they submit us another loan that is a different profile, and we may price it a different way. So, again, I just wanted to make this very short video over what goes into a loan. But think about if you were in our shoes, what you would consider about pricing alone, and that’s how we do it. Not an exact science, it’s more of an art. We don’t hit the nail on the head all the time, but we try to price what we think the market is. And self-understood, everything is somewhat negotiable because there are so many points of a loan: loan amount, points, interest rate, length, if there’s a prepay or not. There are so many details of a loan. Every deal is a little different. And at Gelt Financial, if a borrower or if you, if you view the borrower, if you don’t like a specific point, if you don’t think we hit the nail on the head, we hope you call us and let us know because we’d love to earn your business. So, I just thought I’d make this short video on how we price alone at Gelt Financial. Take care and have a great day.