It Takes A Team of Professionals To Close Loans, Including Third-party Vendors. By Dan Harkey

Willing buyers and sellers, along with the lender(s) making the “purchase money” loan, if applicable, are the catalysts that precipitate the event of a loan closing. All three are principals to the transaction. If a borrower is financing or refinancing their property, then a willing borrower and lender are the principals. Each party’s pivotal role is integral to the transaction's success.

Third-party vendors, such as appraisers, inspectors, and title companies, are separate and distinct entities for the borrower and the lender involved in the lending process. They play a vital role in facilitating the closing by providing essential services like property valuation, inspection, and title verification.

The principals of a transaction, be it the buyer, seller, and lender, or the borrower and the lender in a refinance transaction, are the parties who give crucial instructions to the escrow holder. The escrow holder's role is vital and influential in shaping the course of the transaction and ensuring its smooth progress. They act as a neutral third party, holding all the necessary documents and funds until the transaction is complete, thereby reducing the risk for all parties involved and providing security.

The real estate agent, who works for or on behalf of the buyer and seller or the borrower and lender, is not a principal party. However, their role is crucial in facilitating the transaction and ensuring all parties are satisfied with the outcome. They assist in finding the right property, negotiating the terms of the sale, and ensuring all necessary documents are in order, thereby adding significant value to the process and instilling confidence in all parties.

Real estate agent:

The agent’s primary function is to bring a qualified property and a qualified borrower to the table, with the expectation of compensation, to complete the transaction as professionally as possible. They also play a crucial role in negotiating the terms of the sale and ensuring that all parties are satisfied with the deal.

Loan brokers, agents, and direct lenders:

The procuring loan broker acts as an intermediary between the borrower and the lender and as a fiduciary, helping the borrower find the best loan options and guiding them through the application process. Conversely, suppose the loan broker works on behalf of the lender. In that case, they have a fiduciary obligation to that lender and assist in qualifying a prospective purchaser or property owner to obtain a loan. As the name suggests, direct lenders provide loans to borrowers directly, always in the borrower's best interest, and often have more flexibility in their lending criteria.

Loan processors-Qualified intermediates:

Loan processors are qualified intermediates who bring all the facts and third-party reports together so that the lender can make an informed credit decision. They play a crucial role in the loan closing process, as their work directly influences the lender's decision to approve or deny the loan.

Loan underwriters:

The loan underwriter receives a completed package, as much as possible, to make an objective (sometimes subjective) decision about approving the loan transaction. Their role is pivotal, as they may have questions that require more effort to obtain and more time to evaluate the merits of approving the loan transaction, ensuring the integrity of the process.

Some lenders outsource their legal document preparation to a third party. A third-party legal counsel or knowledgeable consultant is advised since the lender is responsible for state and federally-required disclosure documentation.

Commercial lending is sometimes characterized by loaning to entities such as trusts, corporations, limited partnerships, and limited liability companies.? There is a required technical understanding of the laws relating to these entity types and the documentation differences each will need.? There is also the issue of lien priority.? Documentation complexity can be compounded when the problems of lien priority and tenancy are added to the mix.? Your borrower may own a property in a family-limited partnership, occupy the same property as an operating business or a corporation, and have other unrelated tenants.

Escrow Companies and their function:

Not all escrow officers are alike.? A competent, experienced, and highly technical escrow officer is a must.? Escrow acts as an intermediary and dual agent between the principal parties to ensure that instructions and agreements are carried out correctly.? The lender’s final closing instructions to the escrow officer should summarize all the conditions that have been met and under what conditions they may close the transaction, using the correct title insurance policy at the recording to ensure lien priority.

Title Insurance Companies and their function:

I do not have much respect for the title industry; therefore, I should ship comments. Title insurers sell insurance policies and collect premiums but rarely pay out claims.

Credit reports and credit reporting agencies:

Minimal needs to be said about credit reporting agencies.? They all use the same databases to accumulate the historical credit background of a borrower.

Real Estate Brokers who make or arrange loan transactions in California are subject to 10232.3 and .5 of the Business and Professions Code, which consists of a list of disclosures and requirements for investors who may purchase a portion or all the trust deed investment. ?Section 10232.5 subsection (4) states that the Real Estate Broker must provide the “identity, occupation, employment, income, and credit data about the prospective borrower or borrowers as represented to the broker by the prospective borrower or borrowers.” This is easy to comply with when the borrower is either an individual or a seasoned entity with years of financials, history, and credit.

A standard credit report should provide all the information you need.? However, loaning to a newly formed entity to purchase or hold a property creates an additional question.? Do you need to run a credit report on the entity knowing nothing will happen?? The answer is “yes,” as an abundance of caution. Real estate brokers play a crucial role in these situations, ensuring that all necessary information is provided and that the borrower is well-qualified for the loan.

Appraiser(s)

The agent is responsible for identifying a well-qualified, licensed, and insured appraiser familiar with the geographic location and property type and following the Uniform Standards of Professional Appraisal Practice (USPAP) requirements.? USPAP provides the body of knowledge and performance standards for the appraisal process as authorized by the US Congress (this was part of FIRREA in the early 1990s and arose from the Bernard Amendment).? This legislation contains standards for all appraisal services, including real and personal property and business enterprises. ?It is revised and updated yearly.

The Real Estate or mortgage Loan Broker must establish that the appraiser is qualified by license or specific certification to accept the assignment for the intended security property. The Bureau of Real Estate Appraisers' mandate is required under Business and Professions Code Section 10232.6. This mandate is crucial in maintaining the quality and integrity of appraisals, ensuring that the appraiser is competent and qualified to provide an accurate property valuation.

The first document used is an “order form,” which will document the type of appraisal, by whom and when the appraisal will be paid for the job, and “who may rely on the appraisal.”? Suppose you, as a mortgage broker, act as an agent on behalf of private investors/lenders who intend to fund the loan, or you plan to sell or assign the loan following investing the loan with our capital.? In that case, the appraiser must be informed that the private investors/lenders will rely on the appraisal report. ???In addition to appraising the property, it may be necessary for the appraiser to do a rent survey, a lease-up or absorption study, a personal property appraisal, or an ongoing concern business valuation for an operating business.

“Assumptions and Limiting Conditions” are sometimes thought of as the “legalese” or “boilerplate” of appraisal reports.? The “assumptions” relate to the scope of work identified in the appraisal process.? In writing, the appraiser will lay out assumptions such as the correct legal description, that the zoning is proper for the property use, and that the information furnished is true and accurate.? ?A “limiting condition” limits the use of the appraisal, primarily by specifying the use and intended users of the appraisal report. ?That is, who may rely on the contents of the information? ?However, each assumption or condition must be reasonable and supportable in the appraisal content and not conflict with the “Extraordinary Assumptions or Hypothetical Conditions.”

Also, it is essential to review the appraisal section, “Extraordinary Assumptions and Hypothetical Conditions.”? This means the appraiser has taken some action or used a method that departs from USPAP standards. ?The appraiser may have made assumptions that could render the appraisal little or no value. ?You may find this when the property is zoned incorrectly for the neighborhood or the property’s intended use or when comparable(s) are difficult to locate.? Some examples of extraordinary assumptions may be assuming that all entitlements are complete for a construction project, considering that there is adequate absorption for lease-up, if the building conforms to zoning and usage ordinances, assuming that the property construction will be completed timely, and on budget, and considering that there are no environmental concerns.

As a final comment, you must read the entire appraisal.? There are issues such as the number of area vacancies, the applicable capitalization rate, and a discussion regarding verifying city permits that you may want to verify personally. ?These are not always clear in the first reading. ?For example, the area vacancy and applying a capitalization approach may differ in Riverside, CA. Then, in Newport Beach, CA.

Property Insurance brokers, insurance companies, and insurance agents:

Insurance brokers and agents represent insurance providers that employ them to help sell insurance policies to the public. Captive agents are used by an insurance company, an agent of the company, and not the policyholder. A captive is a fiduciary of the insurance company. An independent insurance broker or agent will represent multiple insurance providers and compare policies to determine the best coverage solution for the property owner.? The solution will include a property insurance policy and numerous endorsements to cover types of contingent liabilities.? The independent insurance broker or agent is a dual agent.

Environmental Engineers and property surveyors:

As a lender, you have the option of quick public records search to identify any properties around the subject that may have used contaminants that could affect the property, or that would call attention to the need for further inquiry.? An example of such a database in California is the State Water Resource Control Board “Geotracker.” The lender also has an option for a limited phase I or complete phase I environmental site assessment to determine whether the property contains or has ever contained identifiable contaminants.? The environmental engineer will report that information and comment on how it may affect the desirability and salability of the property.? For properties built before 1978, the issue of asbestos arises.? Also, lead-based painting was commonly used in construction before 1978.? Today, the standard approach is to do nothing about asbestos or lead-based paint if they appear contained or sealed.? Adverse findings by the environmental engineer may lead to the need for soil borings and phase II or III environmental site assessment.

Property Inspections/Property Condition Assessments:

Some lenders will require a property inspection by a third party trained in that field.? The Property Condition Report (PCR) is used by purchasers and lenders who take the property back in foreclosure to assess value for resale and limit liability on resale. ?These reports tend to be very detailed and may require several specialists to evaluate the various components of the property, both real and personal.? The process can be expensive, costing from $20,000 to $100,000.? This form of third-party assessment is rarely used in private money loan transactions because of the nature and purpose of the loan request.? Limited condition assessments may be available for much less expense.

There are many risks associated with commercial real estate lending, many of which will be discussed in subsequent articles. None, however, quite rises to the level of the need to use highly competent and highly skilled third-party vendors. You are the one who has the option to search for and hire?the most professional vendors. If substandard vendors are used, you, your company, and your investors will be stuck with the results.

Municipal or city-required pre-sale inspection reports:

Many cities have specific requirements to close an escrow. Of course, the city inspections require an application, a fee, and taxes.? Many towns do now allow real estate sales contracts to be signed without inspection.

In Laguna Beach, California, obtaining a real estate property report (PRP) is necessary before selling or exchanging real property. This requirement is established in Chapter 14.76 of the municipal code. The fee for obtaining the report is $400 for residential properties and $545 for commercial properties. It takes about 30 days to receive the report. The compliance requirements are detailed in 14.76.040 applications. The property owner must make affirmative representations about zoning, construction, electrical, plumbing, heating, permits, conformity to zoning and usage ordinances, etc. Penalties for violating these provisions are severe. An inspector will physically inspect the property to ensure compliance.

Other cities have similar requirements, including Los Angeles, Beverly Hills, Burbank, Long Beach, Newport Beach, Palos Verdes Estates, Pasadena, San Diego, etc. As cities realize there are fees and taxes to collect, the list can be expected to expand dramatically. ?

Commercial and residential real estate broker(s):

In metropolitan areas, finding a real estate professional with the background, knowledge, and experience of the product type and geographic location is a matter of a good referral or inquiry.? If the subject property is in a sub-market or a rural market, the time should be taken to locate a broker at the front end while the loan transaction is being processed.? Brokers in these areas tend to be generalists who list and sell whatever kind of real estate is available.

Independent foreclosure trustees (agents):

A foreclosure trustee assumes the role of an agent acting on behalf of creditors (beneficiaries) of trust deeds and mortgages to complete foreclosure proceedings. If property payments are reinstated and the loan is current, the trustee will be paid a fee for services by the foreclosing creditor or the defaulting borrowers. States have different statutory foreclosure procedures and methods. The distinction is the judicial process versus the non-judicial foreclosure process.

When a borrower defaults on their mortgage or trust deed, a foreclosure trustee is appointed to handle the legal proceedings on behalf of the creditors or beneficiaries. The foreclosing creditor or the defaulting borrower compensates the trustee if the loan payments are reinstated and brought current. It is important to note that different states have different foreclosure procedures and methods, with some using a judicial process and others using a non-judicial process.

If the collateral is personal rather than real property, the security instrument will likely be a UCC-1 filing with the Secretary of State. The trustee may concurrently foreclose on real and personal property through two rules. Personal property foreclosures are much faster.

A real property lawyer and a good foreclosure trustee must chart the proper course for the creditors to regain title and control of the collateral property.

Building trades workers:

Support trades, including gardeners, trash haulers, painters, roofers, roof inspectors, electricians, plumbers, contractors, and high-quality handypersons. Each must be well vetted and on call to step in and solve building problems. The pressure of timing is always an issue because of the shorter escrow closing period.

The system is complex, rational to some degree, and irrational to the extent that there is government intervention. It always demands a fee or tax for the privilege of transaction business.

The current system has worked, to some degree, for the last 100 years. Still, it is changing due to technology improvements, government intervention, erosion of property ownership rights, and foreseen and unforeseen ownership liabilities.

Artificial intelligence will affect future lending, but the development of applicable platforms is early.

Thank You

Dan Harkey

Educator and Private Money Lending Consultant

949 533 8315 [email protected]

Visit www.danharkey.com

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