The multifamily housing industry has largely relied on spreadsheets and other user tools to perform most business processes, including underwriting, origination, pricing, servicing and accounting. Due to increased requirements for controls, data integration and operational efficiency, a new wave of tools have emerged. As a result, some of the larger multifamily originators and investors have started to stick their toe in the uncharted territory of commercial off-the-shelf tools, but there is still a lot of uncertainty.
Spreadsheets are the backbone of financial analysis. Whether creating a pro forma on a multifamily property, reviewing the principal’s financials or analyzing a property’s budget versus actuals, the originator and underwriter rely on the speed and flexibility of spreadsheets. However, spreadsheets have insufficient built-in controls for data, validations and security.
Multiple spreadsheets can be difficult to integrate into management dashboard and pipeline reports, which prevent data mining analysis. Also, with the increased use of mobile computing and the exponential growth of smartphone technology, spreadsheets alone cannot offer ease of use and the format of choice for today’s virtual workplace.
So what does all of this positive and negative of the spreadsheet mean for multifamily lenders? It depends. For a smaller lender whose transaction volumes are not high, spreadsheets are the common choice for analysis, process tracking and management reporting. For the larger lender, the flexibility of spreadsheets is necessary for loan-level decision making, but not as much for pipeline and portfolio management. What should lenders do? Define the strategy, understand business processes, research available products, determine the costs, evaluate the risks and make a decision to move forward.
A small multifamily lender processes and closes anywhere from 10 to 50 deals or more a year and is building a servicing portfolio. The small lender is typically in a few markets with a small number of office locations. The entire staff knows every deal and acts as built-in quality control because multiple eyes are always looking at the deals. Small lenders typically manage their business with spreadsheets. But this strategy may not support a growing business. For lenders that are closing more than 75 deals a year, spreadsheets become unmanageable. They’re no longer the little guy in a local market, but a bigger player doing deals across multiple states. They need to be more competitive.
When a lender’s loan volume begins to grow, the ability to track business pipeline becomes even more important. There are too many deals to track using manual spreadsheets. The ability for lender executives to have portfolio information at their fingertips about legacy deals in the market is essential for analysis. This type of information management is not manageable by spreadsheets.
In order to remain competitive, small lenders need to be structured like the large national lender, with an integrated underwriting system and the ability to provide market, sponsor and property history reports and information at the push of a button.
Many years ago, a senior executive at a national multifamily lender once said to me, “I can hire three college kids at minimum wage to do all my spreadsheet work; I don’t need to invest in a big underwriting system.” That is a strategy. But in this case, that lender was bought out by one of the big banks that had its own origination and underwriting system.
