ONE FOR THE BOOKS! No comments yet

Just when you think you have everything under control and your transaction is in the home stretch of being closed, good ole’ Murphy’s Law (you know, whatever can go wrong, will?!) reared its ugly head! We were in the throes of closing another non-recourse loan on a single family home in San Jose.  This was a bank owned property and the ground rules were made very clear - we had to close by Friday March 12th or the bank would pull the deal away from my investor client and re-open bidding for new offers.  The borrower(also a realtor by trade) who was buying the property with his IRA knew that no other property in the same neighborhood sold for less than $350,000, but the purchase price was $280,000, a virtual steal. Nevertheless, this is the kind of market we’re in and the alert investor who studies values can pick up these types of deals.

In any case, back to what happened. We had a pre-approved non-recourse loan from the lender and had completed sending the bank all the necessary paperwork including: borrower’s application, IRA statements, purchase contract, title report, etc.  The appraisal had just been ordered and the appraiser had already done the inspection of the property.  This usually means we’re far along in the loan process.  If the appraisal comes back with a reasonably satisfactory description of the property and the price is in line with the purchase contract, tha bank almost always proceeds to complete the loan process and grant the loan.  This time things went differently. All of a sudden, the lender’s Vice-President, who we deal with on a regular basis, requested a copy of the termite report. The title report made mention of the termite report so it needed to be produced upon request.  Once the VP saw the termite report he put the ‘cabosh’ on the deal.  No one was trying to hide anything but it’s not often that a termite report ruins the loan.  In this particular case, there was a greater amount of repair work that was needed than usual for a small single family - we’re talking at least $10,000 or more. The lender would have nothing to do with this. Even though our client already had a contract for the sale of this property as soon as he closed escrow, the lender refused to go any further. He threw it back in our lap.

At this point my client was at wit’s end, as was I. The borrower already had a contract to sell this property  for $50,000 more than the price he was paying so he stood to make a handsome profit……if we could just make him the owner first?!  Lending Resources called on a ‘hard money’ lender that they knew.  That was our only option.  The usual non-recourse lenders had all been spoken for. Fortunately, this ‘hard money’ lender was ready to act immediately to help us close the transaction.  He was not concerned about the termite report.  He only required an appraisal equal to or greater than the purchase price and all the usual paperwork.

We only had 8 business days to get the appraisal done, get all disclosures signed, get the loan docs drawn for signing by both Pensco and the borrower, have funds wired and record all in a week and a half.  This process usually can take 3 weeks or more from start to finish. Moreover, the hard money lender had never done a non-recourse loan for an IRA investor. As a result, he had a lot of work to edit his loan documents so they didn’t reflect the usual personal guarantee language. Further still, he was having computer trouble on the day that he was supposed to draw loan docs. Once again ole’ Murphy was at work.

The lender started to worry me.  By Wed. - 2 days before we had to close - the lender said this will never close by Fri., get an extension.  The seller’s (bank’s) agent said there would be no extensions. I told the lender to get the loan docs to title and we’ll take care of the rest.  He was having computer problems and it was going to take longer than he thought to change the language in his standard loan docs.  He almost didn’t want to do it because he didn’t think there would be a chance of it closing and why spend time on something that is futile?!  Again, I said, please generate the loan docs and send them to title.  We’ll handle the time frame. Lo and behold, the lender sent the newly conceived non-recourse loan docs to title by 5PM Wednesday evening and an appointment was made for the buyer to sign papers first thing in the morning on the 11th.

The fun to meet the deadline had really just begun.  The buyer signed his share of the documents on Thursday morning.  He took them to San Francisco himself to ensure that his custodian, Pensco, signed them and to return them to the title company by 5PM so they could be prepared correctly for recording on Friday morning, March 12th.  

Pensco has risen to this challenge many times - to sign a client’s documents in the 11th hour so they can be recorded and the purchase transaction can be completed. Fortunately for us, Ms. Jeanny Lo, the Vice-President of Real Estate Investments, was available that day to make it happen. Jeanny has been our non-recourse deal saver on many occasions and this time was no exception.  She was able to have her company’s notary witness the signing with time to spare. The borrower then drove them back to the title company in San Jose. This was the only way we were going to be able to go on record the following day - the deadline. The title company confirmed that they would go on record the next morning - just in time! Once the property is on record, the bank cannot retract the transaction. 

The rest is elementary.  The title company recorded the property in our client’s name on Friday, the 12th and received confirmation from the county the same morning that our client was on record as the new owner.  Funds were also disbursed on the 12th. We made the deadline.  It was really ‘nip and tuck’ but we had alot of people working on this transaction towards a common goal.  

‘Kudos’ to the buyer’s realtor for putting the whole deal together, the lender who made the financing available and completed the loan docs on time, the escrow/title officer for staying late and coming in early to prepare docs for signing,  the borrower for ‘taking the bull by the horns’ and driving the paperwork to and from San Francisco to get them signed, Pensco for making themselves available on very short notice to review and sign them as well as yours truly for pulling a ‘rabbit (loan) out of a hat’ in the 11th hour. What a team - congratulations to everyone on a job well done!

Financing Mixed-Use, Not So Loose! No comments yet

It seemed like a ‘no-brainer’ at first! A fully occupied mixed-use building conveniently located in Fairfax, CA - steady tenants, easy parking, back yards for each of the 3 apartments, a newly re-done coffee shop and a hair salon that’s been there forever. Furthermore, the buyer was highly qualified. She was very creditworthy and had good liquidity. So what could be wrong with this picture? In the first place, the bank that owned the mortgage would allow a borrower to assume it only if they put down a minimum of 30%. Moreover, the current rents weren’t supporting a debt ratio that was acceptable to the bank based upon the assumable loan amount and the remaining down payment. 

Lending Resources Group (LRG) was asked by the borrower’s experienced agent to structure the loan so that it worked for the borrower and was still acceptable to the seller. We still had to find a lender that was willing to permit the seller to carry back a portion of the required down payment, because the borrower did not want to put down more than 20%. Most lenders wanted a 30% down payment from the buyer.  After several inquiries, LRG decided that Bank of Marin suited its client’s needs and requirements. It went like this:  the borrower would put down 20% of the purchase price which was established at $680,000. That amounted to $136,000.  The seller would carry back 10% or $68,000 which this bank permitted. Bank of Marin would supply the remainder of $476,000 which gives us a total of $680,000. OK, so far so good.  Now all we needed was a supportive appraisal. The appraisal was ordered by the bank after the buyer approved  the inspection report.

The bank received the appraisal report about 2 weeks after ordering it. The report was very comprehensive and the value of the building was established at $690,000.  Sounds good, right? The value was $10,000 higher than the purchase price.  You would think we were good to go with the loan? NOT SO FAST! The appraiser chose to reduce the rents of the 3 residential units by a total of $550.00 claiming they were not supported by the rental market in Fairfax. Lending Resources called the appraiser to speak with him about this. He said he would raise the rents if we could provide additional comps supporting the rents they were paying. The seller’s agent and LRG had a conference call with him also and he repeated the same thing, “find me other comps to support the current rents and I’ll raise them back up.” The only trouble was 2-fold, he had found all the comps available in Fairfax for his appraisal and he wouldn’t accept comps even 4 blocks away in the next town of San Anselmo - he only wanted comps in Fairfax. This was despite the fact that the seller’s agent had worked with this property over the past 7 years, knew the tenants very well and knew they preferred living there instead of other locations in Fairfax that might be larger or have higher ceilings. The lowering of rents had never been done with any prior appraisals on this property.

One of the key elements that the appraiser used for reducing the rents was the lower ceilings in 2 of the 3 units. The seller’s agent said in all the years she had seen appraisals done on this property, no one ever made that an issue. Murphy’s Law seemed to be at work here - once again something was interferring with getting this loan approved.  You ask WHY? The reason is simple.  If the rents are lowered by the appraiser, the debt ratio is not going to work according to the bank’s requirement of at least 1.2:1.0. They’re either going to refuse to do the loan or lower the loan amount.  In this case, they chose to lower the loan amount by $40,000, so instead of lending $476,000, they were only willing to lend $436,000. 

Who was going to make up this shortfall?  I can tell you it wasn’t going to be the seller, because he felt he had lowered his asking price enough.  Nor, did the buyer want to put in any additional funds. The deal looked like it was falling apart. What were the seller and buyer willing to do? After much haggling with the appraiser and a strong effort by both LRG and the bank’s business development officer with the underwriting manager, Bank of Marin agreed to increase the loan amount to $456,000.  That only left a shortfall of $20,000. The seller agreed to add another $10,000 to his carry back to make that $78,000 and he also agreed to allow the buyer to sign a separate promissory note for $10,000.

This was a team effort no doubt by everyone involved.  The seller’s agent did an excellent job of dealing with the difficult appraisal and a somewhat disgruntled seller.   The buyer’s agent did an excellent job of negotiating on behalf of his buyer and helping her stay cool since this was the first real estate investment transaction for her besides her house.  Bank of Marin was cooperative in the long run despite a difficult appraisal. Lending Resources kept the wheels turning by informing all parties what was needed to make this transaction work.  Everyone knew what had to take place and everyone pulled together to make this deal successful.  It’s a very difficult lending environment even when all the ingredients for a successful transaction are present. Kudos to all involved!