Years of lending distilled into a french fry test?

Have you heard of the french fry test? 

When I first got into the mortgage industry, I met an agent who specialized in lending to pubs that had a beer store attached. 

It was super niche, but he had been doing this for twenty years.

When I meet someone who has successfully been doing something so oddly specific, and for a long time, I always get curious.

I asked him, “What is one thing you have learned from lending to all these pubs with beer stores over the years?”

He said to me, “Great question. I can tell whether a pub is making money with the french fry test. I can tell this before I even look at the financials.”

He went on to explain that a pub needs to break even during the day, and makes all its profit in the evening.  

When pubs start to lose money, the owners look for ways to reduce costs. They make cuts on things like the number of french fries you get with your burger. 

He said the french fry test was eerily accurate. He used this information advantage when negotiating loans with the pub owners. 

Crazy, isn’t it? 

Years of lending experience distilled into a lowly french fry. 

My friend had developed what is referred to as an asymmetric information advantage. He knew more because he had eaten at, and reviewed the finances of, hundreds of pubs over the years. 

The poor pub owners had no idea they were negotiating with a shark who could smell blood in the water. 

There are plenty of asymmetric information gaps that still exist in the mortgage industry. For example, how much do lenders actually pay, and what are all the various types of compensation? 

For most of my career, broker owners held onto this information, and many agents were left in the dark about how much compensation was actually available from any specific lender. 

I recently published two blog posts that break down the compensation into four key areas: Finder’s Fee, Volume Bonus, Efficiency Bonus, and Points or Perks Programs. 

I have broken this down for TD, First National, Scotiabank, and MCAP so far. 

You can view both blog posts here and here.

I recommend grabbing a glass of wine and some fries, and spending a little time reading these blog posts over the holidays, to help you avoid any future asymmetric information gaps. 😉

I hope you find them helpful. 

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