Mortgage banking has experienced a structural change. It will never be the same nor will the documentation that supports it. Consider this article a nudge to read the fine print in all of your real estate related documents unrelated to the size or type of the transaction. This is a blanket statement; no real estate transaction is too big or too small to benefit from a sincere review of the finer details.
With commercial mortgage documents, based on their inherent thickness and often mundane redundancy, people tend to defer to counsel as being responsible for combing through the fine print. I suggest coffee, black, a highlighter and good reading light.
Parts of the document that cause you to pause, even the boiler plate segments, pre-signature is the time to pose questions to your attorney for further clarification. It always amazes me when buyers wait until the day of closing to review loan documents. Yes, they can change some up until time of signature. Usually, the majority of the document remains static. Requesting an advance copy is common practice.
A mortgage is an agreement between and mortgagee and mortgagor that outlines the responsibilities of each party. The terms of the agreement are set out by the lender to protect their investment (money) loaned against collateral (real estate). The mortgage documents outline in great detail the rights of the lender in case of default.
I recently met a man who owns a small convenience store in a small town. People come and go all day. Frankly, I am certain it wouldn't matter what he sells in the store because the primary business is loaning money. He loans out $20 at a time and expects $25 back in seven days. That's it. That's the business. It's the same business model as JP Morgan with just a little difference in scale (six or seven zero's is all).
His is a simplified version of banking (very simple). There is a loan amount provided with expectations of repayment along agreed upon verbal terms. What happens if he is not re-paid? It's the worst possible outcome for the borrower is that he will not loan to that person again. In a small town, with limited credit options his loan is the end of the credit trail for many. Thus, he has few non-payers.
Based on our wired and wireless life, most of us are numb to Terms of Service (TOS) agreements and quickly check the box to move into the app of the moment. With real estate mortgage documents, it is in your best interest to read the entire document, page by page, always. There is no replacement for time prior to signing the documents.
Build in time for review by your counsel. Waiting until the last day (or the day before) to blast your attorney with a dozen questions with eight hours until closing is something to be avoided if at all possible. Granted, in complex transactions this is common practice, but not all transactions are complex. Building in processing time, in terms of time to think through responses, leads to better outcomes.
Mr. Wilhoit is the author of three books: How To Read A Rent Roll: A Guide to Understanding Rental Income and Multifamily Insight Vol 1 & 2 – How to Acquire Wealth Through Buying the Right Multifamily Assets in the Right Markets.
Multifamily Insight is dedicated to assisting current and future multifamily property owners, operators and investors in executing operational and financial management of multifamily assets to their highest level of efficiency. This article is intended to be informational only and does not provide legal, financial or accounting advice. Visit: multifamilyinsight.com