Engaged with banks in the rate wars on one side and facing dwindling origination business on the other, brokers are increasingly looking to expand their streams of revenue while at the same time retaining their client base. CMP learned that some have done just that with syndicated mortgage investments
How can brokers make better use of their most valuable asset – their database? That was the question Roy Deeks asked himself as he was looking for a way to capitalize on something he’s spent the last 30 years building. The answer for him, he discovered, was syndicated mortgage investments.
“Over the past few years there has been a lot of talk about how mortgage brokers have to diversify and that some other financial services need to be added to their suite of products in order to build a fence around their client and try to retain or grow market share in a market that is actually diminishing and getting increased competition from the banks,” says Deeks, principal broker with Unity Financial Services-The Mortgage Centre in Richmond, Hill, Ont. “That’s where I got onboard.
“I’m also at that age where I’m asking myself, ‘How can I work less and make as much or more then I was before and accomplish what I want without having to create a whole new model and work twice as hard to get the same revenue.”
With this product Deeks could go to his database, many of whom have aged with him. Deeks say many of them are now at a stage where they are wealth-building and they’re sitting on existing funds such as RRSPs and TFSAs, all with a moderate rate of return. They also have unused RRSP contributions and they have equity in their homes.
“It was a perfect storm for me,” says Deeks. “It’s not for everyone, but a lot of brokers see this as not only a great tool for their clients, but also a recruiting tool for their mortgage business because very few brokers currently offer this kind of product.”
For Christopher Molder, a broker with Tridac Mortgages-The Mortgage Centre in Toronto, th opportunity to offer something to existing clients is the best part. “We really miss half of a market or half an opportunity that we have as brokers,” he says.
“Traditionally what a mortgage broker really does is connect the people who need money with the people who have money.”
A product like a syndicated mortgage investment allows Molder to extend his services. “My clients already trust me because I arranged their mortgage for them, but what [a syndicated mortgage investment] allows me to do is give them options for investing.”
Working with product providers, Deeks can offer his clients secured investments that pay a return of eight per cent per annum over a three-year term, secured by way of an Interest Reserve Fund held in trust by the Administrator or lawyer, plus a 12 per cent profit participation at the end of the project and they have direct, registered ownership in the mortgage that’s registered against real security.
According to Lance Kotton, president of Titan Equity Group, the firm Deeks works with, term mortgages have less risk and less return, so they took a look at the construction industry where the margins were better.
“By using select and proven developers we could leverage that history and provide them with this type of funding and get a higher rate of return,” he says. “We’re taking equity with the developer and converting that into a yield for the investors. By doing that it allows an A-quality deal with a top developer enabling a higher return for clients.” Titan started small six years ago and it has grown to the point where “the best thing that could have happened to us was the market crash because that’s when people realized that the markets weren’t the best place for them to be,” says Kotton.
“Titan is a real estate development and investment company that provides sound investment solutions for a diverse client base, we have a complete line up of stable and rewarding products to serve and provide generous returns on investment,” says Kotton. “Investors with Titan products assured that their capital, which is asset-backed, is optimally employed to assure efficiency and effectiveness.
“What [Titan] brings to the table is trust, transparency and tenacity, offering the opportunity to grow and excel in a stable and accelerating real estate environment. With a flexible product line-up, experienced management and tact analysis coverage Titan provides investors the ability to succeed in the real estate market seamlessly, securely and successfully. Having Titan asset backed products instead of debt-based products ensures strong and consistent returns.”
Traditionally, says Deeks, brokers have acted between a consumer-borrower and a lender. Under the syndicated mortgage product “you’re a broker between the lender and the borrower: lenders are the investors now and the borrower is the developer.” According to FSCO guidelines and the Mortgage Brokerages, Lenders and Administrators Act (MBLA) every client has to have their documents reviewed with a registered mortgage agent or broker.
“It’s a rebirth of sorts for us,” says Deeks. “And enables us to go back out there and gain market share because these products have to go through a mortgage broker.”
To get started brokers just have to go through their database and identify clients that have RRSPs, says Kotton. “Then you say, ‘What are you doing with your RRSP? How would you like to make a decent return and actually provide for your retirement as opposed to what you’re doing now?’”
Client retention is critical these days as brokers struggle against banks and their special offer interest rates and their growing force of mortgage specialists.
“Banks are pushing brokers out of the marketplace to a certain extent as well as not having the same commitment to the broker channel that they’ve had in the past,” says Kotton. “And here’s a product that helps them retain their client and earns them a good income at the same time.”
Not having to constantly worry about buying down rates is a welcome respite, says Molder. “As the broker I get a finder’s fee and because the mortgage broker business is becoming so cut throat, it’s nice to be able to branch out and have alternative revenue streams and not to have to compete and buy-down rates and always be in a defensive mode to make a buck.”
Deeks concurs about making five to 10 per cent base on the amount of the investment. “The referral fees are greater than what I was earning on my standard mortgage business, so it’s resolved another issue for me and I now don’t have to worry about selling my book of business.”
It’s also changed the way Deeks deals with mortgage clients. Now he makes sure to get more detail about where their investments are because most of the time they are held by a competitor for the same mortgage he’s trying to place.
“There’s a chance to get the mortgage and do something for their investments that the competitor can’t do – it’s no-brainer,” says Deeks.
What’s also simple is how the syndicated mortgage investment ensures clients keep coming back.
“If you send a client to a bank, you’re not going to see them again,” says Kotton. “You have to create a scenario that gives your clients a reason to come back to you. The beauty of this product is that it’s a term product. It could be a one- or a three- or a five-year term, but your clients are coming back to you. And if it’s timed with their mortgage renewal, you’re not going to lose them to the banks either.”
He is also quick to point out that his company doesn’t get in between the broker and the client. “It’s the mortgage broker’s client, not ours,” says Kotton. “They’re our client to the extent of the product itself and that’s the only time and place when we deal with them.”
For Deeks, syndicated mortgage investments are also helping to generate new referrals, giving his business a new lease on life by expanding his database with referrals he would have never gotten before.
“Most of the new business is coming from word of mouth,” he says. “I have clients telling their friends, ‘You should see what these guys did with my investment. If you don’t like what you’re doing with your portfolio, call these guys. It costs you nothing to talk to them.’
That list of established clients that a broker possesses also offers brokers the same opportunity to expand their revenue stream, and all it requires is reaching out to people who already know them.
“We have built a lot of trust with our clients over the past 35 years,” says Molder. “We’re very much in touch with them already regarding their mortgage, so, for us it’s an easy sell to switch hats and say ‘by the way, we don’t usually advertise this, but we have these great opportunities for you to invest your money if that’s something you would like to pursue.’”
The Zero Mortgage
Property Value New Secured Line of Credit
$600,000$ 200,000 @4%
Existing First Mortgage Invest Equity Takeout
$200,000 @4% $200,000 @8%
Syndicated Mortgage Investment (SMI) interest rate and payment covers the debt service on the entire $400,000 mortgage financing, effectively reduces the out-of-pocket carrying cost of the original $200,000 to a net zero.
There are different benefit scenarios to the above example, depending on the situation of the investor. The above example assumes a simple cash investment of $200,000 and the interest cost of the original $200,000 is not tax-deductible but there is a huge benefit to increasing the monthly cash flow by the amount of the monthly mortgage payment. Some investors will elect to continue paying the mortgage payment equivalent to the original first mortgage if cash flow is not an issue but the choice is theirs and does not diminish the benefits individual to them.
However, consider that the investor has unused RSP contributions and applies part of his investment amount to topping up his RSP, which generates a tax refund that can be very significant, depending on the investor. Further, the tax refund can also be reinvested into RESP, TFSA or other investment choices for net worth enhancement. – Roy Deeks