Private Lending

Private Lending

Often private lenders will receive a brief term sheet with an email introduction from a mortgage broker or agent trying to place a mortgage deal.  Included in this email package may be an appraisal that was used perhaps to satisfy a prior lender on the property, or if looking for a second priority mortgage it may have been used for the first mortgage lender that closed on the property months or even years before.  What this means is that the appraisal was not commissioned for you, the private lender.  Its very easy to skim through an appraisal, see if it was ordered for a Big Bank, and rely on it as accurate and reliable.  How often do you read every single page, the assumptions, disclaimers and conclusions?  Most readers are ill-equipped to understand how the appraisal was prepared, under what requirements and circumstances.  Finally, its believed that if  you are relying on an “opinion” any damages by way of gross inaccuracies could result in a claim to recover against the appraiser.

Unfortunately this is where a private lender can be duped into funding a bad deal. Aside from being able to properly read an appraisal report, its important that the appraisal be directed to you, the lender. Making the request to direct a previously completed appraisal report into your name is where your “senses” should be used. You can often get a good sense of the appraiser’s credibility based on their reply when making this request. Unless its obvious that too much time has passed and the market or the property itself has changed, there shouldn’t be a reason why the appraiser would not issue the report into your name or provide you with a letter or certificate effecting the same. This is often referred to as receiving a letter of transmittal.

Appraisers will have their own policies when it comes to providing letters of transmittal. Providing a report has risks to the appraiser. The lender relying on the report is granted permission to use it as required, usually as a basis to make decisions in lending money secured by the appraised property. The lender will have recourse against the appraiser for negligence or any misrepresentations made in the report that were not justified, disclaimed or explained on the basis of certain assumptions.

Too often is the case where a borrower shops around a mortgage deal they are trying to place on a property they own. Whereby they start off with one mortgage broker who ordered an appraisal, and then go to another asking them to rely on the original appraisal completed the week prior. In most circumstances the new broker or lender will not be able to get a letter of transmittal because the appraiser may need the permission of the original client. The original client is usually the first broker or first lender. In these circumstances its highly unlikely that the borrower will approach the request with their first broker or lender, knowing that he or she just wasted their time. Eager to do or beat the original deal, the new broker may apply some pressure on a less experienced private lender to rely on the original appraisal even though they do not have the right or authority.

Now imagine that the appraiser in the scenario above made a critical error in their assumptions. I have seen many poorly done appraisals, especially when it comes to appraising commercial properties. Having a background in commercial finance and financial engineering, putting together a financial model to appraise complex commercial real estate or real estate under development is no easy task. I have seen reports where appraisers misinterpreted a borrower as owning an entire commercial plaza not realizing that it was partially unitized into several commercial condo units and the borrower owning only a few of them. Regardless, in some circumstances these errors could be interpreted as negligent. A lender that suffered a loss when recovering against the property secured as collateral, may have recourse against the appraiser when under the appropriate circumstances, such as where the appraisal report was commissioned or transmitted to the lender. However, if that’s not the case, this lender will have no recourse against the appraiser.

As a second set of eyes, consider using a mortgage administrator when it comes to handling your private mortgage transactions. For a free consultation give us a call.