Thank you all of you for great responses. I'm sorry for my delay, but it was a busy time and did not know how this situation is going to end. Now, I do.
The evening after my message to BP, I received an email from the president of the bank, advising me to have a call with him on Sunday morning. I was surprised that a president of all the branches wanted to speak with me on Sunday morning. I wondered: Was he afraid that something unethical was done or does he really care?
During the conversation, he mentioned multiple times how great they are and how fast they are growing. That's ok; I let him have it. He told me that some of his people are newbies and I should not really take everything they say very strict. I disagreed, as his team member was my only point of contact. If it is a newbie, shouldn't a mentor control everything and just train his protege?
He apologized for his team member, and after a long conversation we agreed to approve the loan, but, told me not to ask him for another loan if I don't move a business bank account by the time I'm ready for the second deal. It did sound fair to me, as that extra time before 1st and the 2nd deal would allow us to build a relationship, get to know each other, etc. He mentioned that people tell him that his bank is like a bank for the seventies; all about a relationship, not just emails, and PDFs :) I loved that idea. He also mentioned that once we have a relationship, the time I contact them regarding the next deal, for them, it's just a different block and lot number. I also loved this idea.
So, our call was on Sunday morning. Right after our call, the president sent an email to his team, asking them to send him all the paperwork for his approval. On Monday I received a mortgage commitment. I was a happy camper; I think 7 days from the application to the mortgage commitment was very fast. Well done!
MORTGAGE COMMITMENT
Now was the time to open 9-page PDF commitment and see what it says :)
I got surprised right by looking at the header of the first page. It was a commercial mortgage. But, that's ok, I didn't know what it means, as I've never done it before. Some of the things I'm going to mention I'm not sure about whether these are standard practices in commercial loans or if they were trying to push it a little.
- 20y fixed
- 5.5%
- commitment fee - $1,000 - "due upon acceptance of the commitment letter" + $250 docs fee. Based on my experience it is a little higher than usual but I thought, it's a local bank, and commercial loan, it makes sense.
- prepayment notice - not less than 30 days (that's fine)
- prepayment penalty - "The prepayment shall be accompanied by all accrued and unpaid interest and all late charges, fees, and costs due from Borrower to the Bank plus the Bank shall be entitled to charge and collect a prepayment premium of 5% in year 1, 4% in year 2, 3% in year 3, 2% in year 4, and 1% in year 5. This surprised me, but I assumed it's a regular practice in commercial loans. Is it?
- appraisal - $500 and it has to appraise. It makes sense, but I always had ana appraisal done before the mortgage commitment was issued. The bank said hey always do it after. Again, commercial banking?
- Insurance - "the borrower will provide the Bank proof of commercial liability insurance......" - After going back and forth with them I was told I don't really have to do that - good.
Conditions to Closing
- "The Borrower and Guarantors shall furnish annually, within one hundred twenty days after the close of each fiscal year, income and expense statements, a balance sheet, signed income tax returns with all schedules, and K-1s, personal financial statements, and any other information requested by the Bank. The Bank shall request interim statements, annual rent roll, and copies of new, amended, and extended leases, at any time from the Borrowers, Guarantors and all related entities now and in the future, at which time there shall be 30 days to comply. Said statements and balance sheet shall be satisfactory to the Bank in the form certified as true and correct by the Borrower and compiled by a CPA satisfactory to the Bank."
It surprised me, and I have to do all this every single year? ...and they have to review it? More on this below.
- Engagement of Legal Counsel - "We are required to provide y ou with a good faith estimate of the charge which you will be expected to pay to Bank's counsel for the services rendered on behalf of the Bank in connection with this loan. Such good faith estimate shall be $2,000.00 together with reimbursement for such reasonable expenses as shall be incurred by counsel in consummating this transaction".
$2k for legal fees? shiut.
Further communication.
Once I reviewed it with my attorney, I contacted the Bank with the clarification questions regarding the above things. The two main things were: 1. The requirement to provide all documentation on an annual basis. 2. Legal fees
My questions were strict about the purpose of the annual paperwork and additional legal fees. The answer I received from the president was that he is in business for over 40 years and this is just a boilerplate they use for mortgage commitments so I shouldn't really pay attention to everything it says, as it's just a boilerplate :) WHAT? I replied that for me it makes no difference if this is a custom form or a boilerpate. I am the one signing it and have to make sure I understand every single sentence, before I'm commiting to it. So, nicely I asked the questions again.
1. Annual docs
I asked about that the purpose of this but did not receive a clear answer. After rephrasing a question three times, still received no answer. I have no problems emailing the bank my annual docs, however, I needed to understand if their "review" of these docs may affect my loan. I am self-empoyed and my revuenue does fluctuate. My attorney took over and asked:
I am the attorney representing the buyer. We seem to be going back and forth with no 100% clarification.
For example, lets say that in 2 years, my client's business takes a financial turn for the worse but my client is able to continue to make the monthly mortgage payment on his loan with your bank, the bank is able to call the loan and require full payment of the loan before 20 year period is over? Please confirm as this is not common in the lending business? I would assume that if my client is not in default of the loan with your lender that your bank is not able to require the loan to be paid off before the 20 year period is complete.
The answer we received from the president was "I have been doing this for over 40 years. Nothing will ever be 100%. Let’s move on or let the commitment expire."
My attorney didn't accept this answer and asked again:
"I don't understand your response. Let me try to be a little more clear. Based on the mortgage commitment, can the bank request the full payoff of the loan prior to 20 years as the loan is based on 20 years."
The president asked my attorney for a phone call, so my attorney tried to reach them unsuccessfully. My attorney's response:
"I tried calling, but apparently you are not at your desk. I do not think it's necessary to speak over the phone as I would prefer to get a clarification in writing from your office about the loan, so there are no issues after closing."
Suddenly, the VP of the bank joined the conversation and responded to my attorney:
"My apologies as the phone number listed below was not correct number, and I just noticed.
As to clarification on whether the loan can be called, you will not get any statement in writing as to what we will or will not do. No matter what clause or stipulations we put in regarding receipt of financial statements and our ability to call the loan, the reality is that the bank can call the loan for any reason it so chooses. We will not mortgage our ability to make sound decisions in the best interest of the bank today on unknown future information it may receive in the future. You only know what you have today, and that goes for both sides. Your client and the bank.
If you wish to discuss further, my direct line is listed below. I will not put anything further in writing regarding this matter."
20min later the president also responded:
"There are no guarantees. You have my emails. We are not negotiating the commitment, and we will not change the closing contracts."
Regarding #2 (i.e. legal fees) they told us that usually, attorney fees are $2,000-$5,000, but this time they can do it for about $2,000 but don't know exactly about additional fees that will be added by their legal counsel" :)
Wow, what a conversation.
So, I love an idea of banking with a local bank, having a relationship, but everything I explained above sounded to me very unprofessional. I would not sleep well if I signed a commitment like this, whether it's a boilerplate or not. At first, I thought that I'm inexperienced in commercial loans, so I reach out to 3 individuals that deal with lots of commercial lending, run it by them, and they all confirmed it was very weird and sounded very unethical. It's kind of funny when I asked about legal fees of $2-5k, they asked me if I'm buying the whole complex :)
I thanked the bank for an opportunity and informed that after a full review of conditions in the commitment letter and not being able to receive clear answers to our questions I decided to pass on it and buy the property for cash.
AM I GOING TO BUY IT?
Yes, I decided to use an HELOC to purchase this property. I did not want to do it at first as it's a variable rate and did not want to be stuck with a variable rate loan on this non-warrantable condo, especially because I'm not sure if the complex will become warrantable in the next 6-12 months or not. However, after calling the bank (different bank, the one where I have my HELOC) and getting some information, I found out that even if you have a variable rate HELOC, a part of the balance can be transferred to fixed, and it's just a matter of filling one form at their location. Again, learned something new. So, hypothetically, if I had $100k HELOC, and spent 80k on the purchase, I can contact a bank and asked them to do 80k on fixed (5y-30y) and keep $20k variable rate with the visa card/checkbook so I could use the $20k as cash. Very nice!
PURCHASING ? BREAKING THE CONTACT?
If all the challenges mentioned above were not enough, here is another one. According to the contract, I was obligated to provide a mortgage commitment by 3/15. I received it on 3/13, but it took like two days to go back and forth with the bank, so on 3/15, my attorney notified seller's attorney that we are just clarifying some things and will provide the mortgage commitment by Friday (3/17). The seller's attorney replied "no problem".
On 3/16, first thing in the morning we received a formal letter from the seller's attorney stating that "they are terminating a contract because we did not provide a mortgage commitment".
Keep in mind that they have multiple cash offers that are $10k+ higher.
My attorney's responded that the termination letter is not only rejected but also unacceptable. He mentioned about the emails exchange from last night, where their office accepted it.
Also, he added that the case law requires reasonable notice to be given to cure the default before a party can cancel the transaction unilaterally. No notice was given by their office, and in fact, their office accepted our notice yesterday of the delay in issuing the mortgage.
Finally, we added that it's not an issue any longer, as I'm buying it cash and the proof of funds is attached.
Seller's attorney replied that he doesn't know a case law that requires reasonable notice to cure the default, a case law that would require notice after the time limit for obtaining a mortgage commitment. He ended his letter stating "Based upon the above, my position remains the same" and notified that my deposit monies will be returned to me.
At this point, I thought I really may lose this deal. My attorney really knows what he is doing. He invests himself and specializes in real estate law. He replied:
I do not have to cite case law at the moment to disprove your attempt to cancel the transaction. Please confirm the seller is willing to continue this transaction. If not, my client will be forced to immediately file a motion with the court by placing a lis pendens against the property requesting specific performance of the sale.
A couple of hours later seller's attorney rescinded the cancellation of the Contract. :)
24 hours later, a listing agent congratulated me on getting this deal (yeah, right), and asked a favor to delay the closing date as the seller has no place to go yet. She needs another 2 weeks. She apologized that they were trying to do everything they can do get me out of that contract. She explained that a seller is poor and could really use extra $10k+. Come on!
What a story, right? :)
It's kind of funny when I'm thinking about all this. It looks like I'm 99% sure I'm going to buy it, but who knows. Whether I get it or not, I learned a lot, and this is the biggest value.
Everything happens in my life, even if I'm not successful in something, I always perceive it not as a failure but a lesson, sometimes pretty expensive, but it is the experience I would not get otherwise.
Thank you for all your help. I went an extra mile and shared this experience very detailed so BPs can learn.
Best,
