Summary: 

The process has many moving parts, from following up on a potential lead to earning an origination fee at closing.  It requires a team of highly skilled professional practitioners, whose collaboration builds confidence and appreciation for each other’s expertise.

These professionals are not just participants, but highly skilled experts, each deeply knowledgeable in laws, regulations, and industry best practices.

Their expertise is the bedrock of the industry, ensuring smooth operations and instilling confidence among all stakeholders, reassuring professionals of their collective competence.

Some transactions are more complex than others and require higher-level service providers and additional subcontractors, each bringing unique expertise.

Article:

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, the 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 from the Borrower and the lender in the lending process.  They Play a vital role by providing services such as property valuation, detailed inspections, and title verification, which are essential for assessing property value and ensuring a clear title before closing.

 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 in shaping the transaction and ensuring its smooth progress.  They act as a neutral third party, holding all necessary documents and funds until the transaction is complete, thereby reducing risk for all parties 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 sale terms, and ensuring all necessary documents are in order, thereby adding significant value to the process.

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 the lender and must assist in qualifying a prospective purchaser or property owner for a loan.  As the name suggests, direct lenders provide loans directly to borrowers, always in the Borrower's best interest, and often have more flexible lending criteria.

 Loan processors-Qualified intermediates:

Professionals who bring all the facts and third-party reports together so that the lender can make an informed credit decision.Loan underwriters:

The loan underwriter receives a completed package and, as much as possible, makes an objective (sometimes subjective) decision on whether to approve the loan transaction.  However, the loan underwriter may have questions that require more effort to obtain and more time to evaluate the merits of approving the loan transaction.

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

 Commercial lending often involves entities such as trusts, corporations, limited partnerships, and LLCs, requiring a thorough understanding of the laws governing these entities and their documentation.  Lien priority is critical in these transactions, especially when multiple liens or tenancy issues are involved, as they affect claim order and the closing process.

 Escrow Companies and their function:

A competent, experienced, and highly technical escrow officer is essential.  Proper vendor selection ensures the transaction proceeds smoothly, giving professionals confidence in the process and security in the outcome.

Title Insurance Companies and their function:

I don’t have much respect for the title industry, so I should ship comments.  Title insurers sell insurance policies and collect premiums, but rarely pay out claims.

Credit reports and credit reporting agencies:

There’s little need to be said about credit reporting agencies.  They all use the same databases to compile a Borrower’s credit History.

Real Estate Brokers who make or arrange loan transactions in California are subject to Business and Professions Code sections 10232.3 and 10232.5, which set out disclosures and requirements for investors who may purchase a portion or all of a 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 financial 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 who is familiar with the geographic location and property type and who follows 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 U.S. Congress (part of FIRREA in the early 1990s and arising 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 outlined in 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 assessment.”  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, the appraiser may be required to conduct 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 set out assumptions, such as the correct legal description, that the zoning is appropriate 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 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 encounter this when the property is zoned incorrectly for the neighborhood or its intended use, or when comparable properties are challenging to find.  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 on time and on budget, and considering that there are no environmental concerns.

 As a final comment, you’ll need to read the entire appraisal.  There are issues such as the number of area vacancies, the applicable capitalization rate, and the need to verify city permits, which you may want to verify personally.  These are not always clear in the first reading.  For example, the area vacancy rate and the 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 and sell insurance policies to the public.  Captive agents are used by an insurance company, not by the policyholder.  A captive is a fiduciary of its insurer.  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 can conduct a quick public records search to identify properties near the subject that may have been contaminated and could affect the property, or that would warrant further inquiry.  An example of such a database in California is the State Water Resources Control Board’s “Geotracker.” The lender also has the option of a limited Phase I or a complete Phase I environmental site assessment to determine whether the property contains, or has ever contained, identifiable contaminants.  The ecological engineer will report the information and comment on its potential Impact on the property’s desirability and salability.  For properties built before 1978, the issue of asbestos arises.  Also, lead-based paint 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 require soil borings and a Phase II or III ecological site assessment.

Property Inspections/Property Condition Assessments:

Some lenders will require a third-party property inspection.  Purchasers use the Property Condition Report (PCR), and lenders acquire properties in foreclosure to assess their resale value and limit liability.  These reports are often very detailed and may require several specialists to evaluate the property’s real and personal components.  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 at a much lower cost.

There are many risks associated with commercial real estate lending, many of which will be discussed in subsequent articles.  None, however, rises to the level of requiring highly competent, highly skilled third-party vendors.  You can search for and hire the most qualified vendors.  If you use substandard vendors, you, your company, and your investors will be held responsible for the results.

Municipal or city-required pre-sale inspection reports:

Many cities have specific requirements for closing escrow.  Of course, the city inspections require an application, a fee, and taxes.  Many towns 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 regarding zoning, construction, electrical, plumbing, heating, permits, conformity with zoning and usage ordinances, and related matters.  Penalties for violating these provisions are severe.  An inspector will conduct a physical inspection of the property to verify compliance.

Other cities have similar requirements, including Los Angeles, Beverly Hills, Burbank, Long Beach, Newport Beach, Palos Verdes Estates, Pasadena, and San Diego.  As cities realize they must collect fees and taxes, the list is 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 submarket or rural market, engage a broker at the front end while the loan 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 between the judicial and non-judicial foreclosure processes.

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 upon reinstatement of the loan payments and their current status.  It is important to note that states have different foreclosure procedures, with some using judicial processes and others using non-judicial processes.

 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 address building issues.  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 of government intervention.  It always requires a fee or tax to conduct business.

 The current system has worked to some degree for the past 100 years.  Still, it is changing due to technological advancements, government intervention, erosion of property ownership rights, and foreseeable and unforeseen ownership liabilities.

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