The commission-based mortgage broker model does not have the general partner in mind, it only considers the amount of the loan. At least that’s what Ira Zlotowitz said after nearly three decades in the industry, including 20 years with the company he founded, Eastern Union. Zlotowitz proposed a radical new pricing model based on subscription instead of percentage-based fees. As a result, it revolutionizes the way commercial real estate owners engage and pay for mortgage brokerage services, saving them tens of thousands of dollars in commissions, empowering them with information, and giving them equitable access. GPARENCY, the first commercial mortgage brokerage founded by Zlotowitz last November, is disrupting the industry by allowing GPs to manage the entire mortgage process under a subscription service that costs $5,000. for membership and a maximum of $11,000 per transaction. Partner Insights spoke with Zlotowitz about how GPARENCY is a game-changer for commercial real estate borrowers.
Commercial Observer: Is GPARENCY a commercial mortgage brokerage company?
Ira Zlotowitz: Yes, we are – we just rate the process differently. With our membership model, borrowers pay significantly lower fees than traditional mortgage companies. GPARENCY membership costs only $5,000. After that, each trade you want to complete costs a maximum of $11,000.
To be clear, when you say any deal, do you mean regardless of the size of the loan?
Yes. Each closure costs a maximum of $11,000. The fees are the same to close a $100 million multifamily refi in New York as to close a $2 million construction loan in Alabama. At this price, it’s like taking half a point off your interest rate.
What would be the normal brokerage fees for these two cases?
The industry standard is for brokers to charge 1% of the loan amount. So in the last examples, for the $100 million deal in New York, the fee would be $1 million and only $20,000 for the construction loan in Alabama. In reality, it’s a lot more work to close a construction loan than a typical refi – let alone a multifamily. Yet the current brokerage model only values the loan amount. In this case, it is therefore 50 times more expensive to conclude a simpler transaction. How can that make sense?
GPARENCY only charges $11,000 even on a large construction loan? How can we do it for so little money?
There is a major misconception, so let me address and explain it. The real question is, why do brokers charge so much when the costs are much lower and the work should be priced the same way lawyers charge – in time and value?
For starters, 80% of commercial property owners don’t even use commercial mortgage brokers. They go directly to lenders they are comfortable with and their office staff manages the process.
With a GPARENCY membership, these same homeowners benefit from our team of 10+ lending concierges providing all bank information on rates and terms and making unlimited lender referrals for any type of transaction. Only if and when a borrower feels they need more service, we offer typical brokerage services and only to a maximum of $11,000 to complete each transaction. The borrower even has the option of only using parts of the $11,000 – for $4,000 we underwrite, buy and negotiate the term sheet, and for another $7,000 we will execute the transaction until the fence.
The subscription covers our basic overhead while the $11,000 covers the brokers and underwriters (we call them financing coordinators) to complete the transaction.
Here is the calculation showing why the $11,000 is still very profitable:
Most deals in the industry are handled by an underwriter who completes about 100 deals per year and earns a maximum of $300,000 to $500,000 per year. This maximum equates to an average of only $5,000 per trade. $11,000 per trade provides a large profit margin. And thanks to our technology, more than 100 transactions can be concluded per year!
Is there any proprietary technology at play here?
Yes, a huge amount. At present, most take place behind the scenes. Over the next 12 to 18 months, my co-founder, Ben Schweitzer, who ran technology products at Freddie Mac, along with his incredible team, will bring all of this technology into contact with customers. To start, at the end of April, we launched the first version with a new product called Match to Lender, which allows any GP to access our website, select their state and property type, and find a lender that fits their deal perfectly. This will change things. Our Match to Lender database lists over 3,000 lenders and can be accessed at gparency.com/match-to-lender. You can type, for example, “multifamily” and “Texas,” and see which lenders lend multifamily in Texas, along with the information you’ll need to call them directly.
What have been the biggest problems you’ve had with the traditional commercial mortgage industry model?
Because there was a single price for all brokerage services, I found that even though they missed out on some of the brokerage services, more and more customers chose to go direct to avoid the fee. And those who used a broker negotiated lower fees, and there was no transparency to show when you could offer a better deal because so much was opaque behind the scenes. Experienced borrowers felt they only needed some of a broker’s services, not all of them. I saw an industry shrink and thought I’d rather be on the growth side, while offering lower subscription and fees at the same time.
You mentioned membership several times. What does a GP get for membership?
They get a dedicated concierge who provides all the CREF information we have, and unlimited lender intros for their transactions. We also build a database of up-to-date, confirmed listings of available deals nationwide, and we do introduction to listing brokers, as well as access to stock resources. Over the next year, as we develop our technology, we will add more and more resources.
Have you received any negative feedback from mortgage brokers about this?
I thought there would be a lot more pushback at first. The reality, however, is that successful brokers believe they are irreplaceable – that’s what makes them great at what they do. A few competing brokers have invested in the business. They said, let’s call it a hedge in case you’re right.
How do you envision the future of the company? What will the effect of GPARENCY on commercial mortgages look like in five years?
The industry is going through changes and mergers. I think the market is moving towards a similar model to residential, to some degree, where people are going to go online and quote their offers under Robinhood-like technology. This gives more power to the GP. I want to be that gateway. When deciding where to go, let me tell you your options.
As to where the market is going, I think a higher percentage of owners will be more comfortable dealing directly with lenders, and there will be fewer lenders, with a lot more mergers.