Situation
Minchella & Associates recently helped a client close a commercial transaction on a multi-unit property.
To complete the purchase and repairs, the client required a loan. They chose to work with a lender that worked with private investors instead of with financial institutions. The Lender promised approval of the loan as soon as the property appraisal was completed. But the broker representing the Lender wasn’t completely candid about what that meant.
The underwriting department changed their requirements every single time the appraisal was modified to meet their requirements. And each time, the borrower had to pay for the upgrade in the appraisal and deal with the delay in closing. Many of the loan conditions were not disclosed making the process at closing all the more difficult.
Challenge
Commercial property sales are generally more complex than residential transactions.
One of the reasons is that the loan documentation varies. In a residential transaction, the loan documentation is consistent from lender to lender both because of Fannie Mae, Freddie Mac, and FHA requirements, but also because of Consumer Financial Protection Bureau requirements.
Although there is some standardization through a software program called “DocMagic”. not all lenders use that program, and each and every loan package can be different. In the instance for this client, because it was a private lender, not a financial institution, the underwriting requirements were different. Most upsetting was that they could not articulate what they needed so that once compliance was made, another requirement was heaped on the borrower. They were simply unable to articulate what would satisfy their underwriting requirements.
The client, believing the Loan Broker’s representations, was willing to put himself at some risk with the Seller—who was also looking to complete his new purchase—by making assurances of the closing, giving up prorations and allow earnest money to be put at risk if the closing did not occur by a date certain.
As attorneys, we are always trying to minimize the risk for our clients, so it is critical to be working with people who have the clients’ best interests at heart. And when we are working with a lender we do not know, it is harder for us to judge what the risks will be.
Solution
We do a great deal of our work by email, so that our communications are documented.
However, in this instance we felt it was necessary to pick up the phone and develop a rapport with Seller’s counsel so that he understood how outside of the control of the buyer the situation had become. Minchella & Associates worked with the client to move him toward closing while also working to protect his earnest money.
Ultimately, after a very contentious closing (because of the lender, not the seller), which demanded a review of every single document, we got the transaction closed.
Outcome
It’s important for buyers to look at the underwriting requirements prior to agreeing to work with a lender.
It’s especially critical for real estate lawyers to pay attention to the differences in commercial property loans as opposed to residential loan documentation.
Working with residential contracts day in and day out can make it easy for an inexperienced attorney to miss the fine print on a commercial document. Minchella & Associates are well-versed in these differences and always ensure their clients have all the facts.
