A mortgage agent told me that although he has faithfully referred clients to a particular bank’s product line for over a decade, that institution recently declined to pay him on a refinance for one of his borrowers. Does that seem right?
Essentially, it means the financial value of that business is gone. More and more, it’s getting difficult to earn a living in mortgage brokering, alone. In today’s competitive mortgage market place, what are you doing to keep ahead of the curve, grow your business and more importantly grow your bank account?
Mortgage brokers and financial advisers alike are constantly looking for new ways to add value and keep in touch with their clients. Whether it’s info on mortgage rates or current trends in the real estate market, it is important to be in front of your clients and provide them a service they need. However, giving your clients updates on market trends and interest rates rarely generates any revenue for you.
So how can you add value to your existing client base, grow your client base and generate new revenue? A growing number of brokers are now pointing to syndicate mortgages.
I think we can all agree that Canadians are beginning to think outside of the box when it comes to investing in their futures. Traditionally, investors diversified their portfolios using the legacy portfolio model, 40 per cent stocks and 60 per cent bonds. This model has proven to be insufficient in the ever-changing Canadian investment landscape.
With wounds of the recent recession still lingering, investors are turning towards hard assets such as real estate to further diversify their portfolios and achieve their financial goals. In Canada, we have more investment options than ever before.
Only 20 years ago, it was difficult or impossible to invest in a REIT, a hedge fund, a managed commodity fund, an international index fund, a derivative, a swap , and on and on. While poorly understood, all are competing for inclusion in yours, or your client’s, portfolio.
Now imagine there was an investment that gave you structure such as fixed terms, direct collateral and consistent cash flow – furthermore, a hard asset that provides security, which is managed by leaders in the industry and represents the best asset class in Canada. And here’s the best part: What if mortgage brokers provided the only way for investors to access this? Well, the syndicate mortgage is such an investment.
A syndicate mortgage provides investors with the opportunity to earn real returns by investing in the communities they live in. So what exactly is a syndicate mortgage? A syndicate mortgage is where several investors combine funds together to create one financial instrument, in this case, a mortgage.
Some sophisticated mortgage brokerages are now creating investment structures like this for the everyday investor. When a client invests in a syndicate mortgage they are funding a larger instrument; however, their investment is always registered and secured directly to the land under their individual name, which translates into direct collateral for them against a real asset. That’s quite distinct from a derivative such as a limited partnership (LP) or investment corporation (IC).
LPs and ICs are examples of indirect real estate investing. In a syndicate mortgage, investment moves as one, but each individual investor is registered and secured proportionally by a direct charge on the real estate subject. Now you may be thinking, is this like a MIC (Mortgage Investment Corporation)?
No, the difference here is that under a MIC, a number of different mortgages may be held, while a syndicate mortgage can fund only one project at a time. And MICs are only available to accredited investors, obviously minimizing the number of clients who can access this. So when a client invests in a syndicate mortgage they choose which development they would like to fund, rather than with a MIC where someone else makes that decision for them. That decision also has a fee attached to it. The other option for investing in Canadian real estate is to buy a rental property. But what the client may really be buying here is a part-time job.
A syndicate mortgage provides developers with the capital and equity they need to take their project from conception to completion. How? Well a syndicate mortgage works in conjunction with bank financing and developer equity. The syndicate mortgages are typically used to help fund the soft costs of a development -- consultants and experts, zoning and architecture, and marketing costs such as sales centre.
By providing these funds via a syndicate mortgage to a developer, it allows the developer to do more, quickly. And just like paying off your own mortgage, this works the very same way. You work out fixed terms, meaning interest payable and amortization.
Most of the time, a syndicate mortgage acts like an interest-only loan. Meaning the borrower will agree to pay a steady amount of interest on the investment (monthly, quarterly or annually) and agree to pay off the entire loan amount on a certain day as defined by the terms of the agreement.
Now this all sounds great so far right? Let’s look at some not so pretty scenarios. What happens if the developer defaults on the mortgage payments? This is one of the best features of this style of investment.
Syndicate mortgages are secured against the land, whereby investors are actually registered to the land or building and real estate law dictates that charges against the land are to be paid off before shareholders and debts to the corporation.
So basically what this means is in the event something should go wrong, the bank will get paid first, then the syndicate mortgage, then everyone else. When looking at referring a client to a syndicate mortgage there are a few things that you as the broker will want to look for.
• Who is the builder/developer that is acting as the borrower? (This is who you are ultimately investing in).
• What is the borrower’s track record? Have they experienced defaults?
• Diversity? Do they operate in multiple markets? (ie, city, regions)
• Do they offer a product mix? Commercial, residential, low rise, highrise etc.?
• Quality of client and adviser support. Do they provide you with the tools you need to sell this to your client?
When telling your clients about investing in a syndicate mortgage you are not only providing them with the opportunity to invest in the best asset class in Canada, you are also growing your bottom line.
Josh Will is a mortgage agent with Centro Mortgage Inc. and a senior manager of marketing and communications with Fortress Real Developments.