I "OWE" 3 POINTS on a loan that DID NOT CLOSE!

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I "OWE" 3 POINTS on a loan that DID NOT CLOSE!

Vahe OhannessianPro Member
Watertown, MA · Member since 2016 · 41 posts · 22 votes

Hello fellow BP-ers,

This is regarding a deal in Massachusetts, so any input from MA Attorneys familiar with Hard Money Lending and related laws would be greatly appreciated.

I recently closed on a property where I ended up closing WITHOUT the original hard-money lender I was dealing with. A few weeks before closing I signed a "Loan Estimate" with the subject lender for $475K with 3 points and 12% interest, and paid a $2500 non-refundable deposit, of which $1,000 went to the broker and $1,500 went to the lender. But because of a Commitment Letter I signed about 9 days before closing, he's claiming I owe 3 points equaling $14,750, and now even more costs as he claims he will be taking legal action.

Admittedly, the letter I signed has only one reference to “Points” which is in this paragraph, neatly disguised in the middle of the document (it did not even catch the attention of my closing attorney):

Termination of Commitment: In the event the Loan is not advanced and the Commitment is terminated the Deposit shall not be refundable to the Borrowers and may be retained by [LENDER, LLC] along with the Points that are earned upon execution of this letter as liquidated damages except in the event of [LENDER, LLC]'s default.

Then, somehow, the VERY LAST sentence of the letter is this:

"By accepting these approval terms, you do hereby agree to pay for all costs and expenses incurred in preparing to close the loan, whether or not the loan is closed, not to exceed One Thousand Dollars ($1,000.00)."

To make things even more interesting, I signed the Commitment Letter as Trustee of [TRUST A], and for a completely unrelated reason, I closed on the property as Trustee of [TRUST B]. Right now [TRUST A] owns nothing and is obsolete.

At no time in any of our conversations was there any mention of points to be earned even if I didn't close with them, including the last conversation when I called him to inform him that I was moving forward without them. I even mentioned I understood why they charge $2,500 upfront because of situations like this. He then congratulated me and wished me well, then sent my closing attorney the request for $14,750 payment, which left me utterly shocked.

Any advice here would be greatly appreciated. The last thing I want is to drag this in court for over a year, but if I have strong grounds I would prefer to let him proceed with his threats and legal action, or settle for something small.

Thank you!

Vahe Ohannessian

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Russell BrazilBusiness Member
Moderator
Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
8y

Im actually of the opposite opinion than Chris here. This is not a consumer loan such as a Fannie or Freddie product, and is not being loaned to an individual. Hard money are business loans, and laws in place to protect consumers do not typically extend into business loans, hard money, loans made to entities.

It seems very clear that you signed a contract that detailed your costs in default.  Id say you are on the hook for the 3 pts.

No legal advice given.

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  • Chris MasonPro Member
    Moderator
    Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
    8y

    I am not a lawyer and this is in no way legal advice, but it's highly unusual for lenders to be able to charge such fees for loans that do not actually close. Generally federal law trumps what's written in private contracts. I'd lawyer up if I were you.

    3Reply
  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    8y

    Im actually of the opposite opinion than Chris here. This is not a consumer loan such as a Fannie or Freddie product, and is not being loaned to an individual. Hard money are business loans, and laws in place to protect consumers do not typically extend into business loans, hard money, loans made to entities.

    It seems very clear that you signed a contract that detailed your costs in default.  Id say you are on the hook for the 3 pts.

    No legal advice given.

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  • Vahe OhannessianPro Member
    OP
    Watertown, MA · Member since 2016 · 41 posts · 22 votes
    8y

    @Russell Brazil and @Chris Mason

    Thank you both for your input. Based on further research it looks like it is being treated more like a business transaction as Russell explained. We'll see how it pans out.

    1Reply
  • Chris MasonPro Member
    Moderator
    Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
    8y
    Originally posted by @Vahe Ohannessian:

    @Russell Brazil and @Chris Mason

    Thank you both for your input. Based on further research it looks like it is being treated more like a business transaction as Russell explained. We'll see how it pans out.

     I'd suggest, since it's a $14k issue, it's worth hiring a lawyer. Maybe Russel is right, maybe I'm right, who knows, you need legal guidance on the issue.

    1Reply
  • Ernesto Hernandez
    Realtor · San Francisco, CA · Member since 2017 · 408 posts · 361 votes
    8y

    I'm sorry this happened to you. However, it is very clearly disclosed. 

    If Federal Regulations do in fact trump private contracts then that may be an out. 

    Mind sharing who this lender is?

    0Reply
  • Vahe OhannessianPro Member
    OP
    Watertown, MA · Member since 2016 · 41 posts · 22 votes
    8y

    @Chris Mason I am seeking legal counsel...

    @Ernesto Hernandez I would rather wait until this is over before I disclose.

    0Reply
  • Edward B.
    Investor · Midlothian, VA · Member since 2015 · 980 posts · 823 votes
    8y

    @Vahe Ohannessian, you may have saved yourself by using a trust as well. I have a friend that avoided a lawsuit because he used a trust and the case apparently wasn't strong enough or worth the money to try and go through it. Only a lawyer can tell you for sure, though. And by "for sure", I mean they can tell you whether or not you have a decent chance of coming out ahead if this guy pursues it and what the best course of action at this point is.

    0Reply
  • Account Closed
    Lender · Los Angeles, CA · Member since 2015 · 399 posts · 174 votes
    8y

    @Vahe Ohannessian

    That contract is so one sided.  I'm in a situation where because of a title issue the seller can't sell.  Based on that contract I would have to pay the lender because it wasn't the lenders fault.  Doesn't seem fair.

    Not a lawyer but I know there is such a thing in law called a Contract of Adhesion.  Check out what this website has to say about it:

    Contract of Adhesion

    1Reply
  • Vahe OhannessianPro Member
    OP
    Watertown, MA · Member since 2016 · 41 posts · 22 votes
    8y

    @Edward B. one attorney told me the trust probably won't hold up if there's a lawsuit.

    @Account Closed that's very useful information which I'm hoping I can use in negotiating.

    Thanks!

    0Reply
  • Caleb Heimsoth
    Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
    8y
    If this ends up being true, I need to get into the hard money business. Make a bunch of money with no risk, minus legal fees. That contract seems really one sided
    1Reply
  • Aaron Hunt
    All Over, USA · Member since 2017 · 689 posts · 756 votes
    8y
    Find another deal and put the cash to use. Otherwise you’re out $14k for nothing if you lose.
    0Reply
  • Edward B.
    Investor · Midlothian, VA · Member since 2015 · 980 posts · 823 votes
    8y

    @Vahe Ohannessian, trusts do not provide much asset protection, but they do complicate things for the litigant. Again, if he chooses to go hard core the trust probably wouldn't stand up, but lawsuits (and especially the threats of lawsuits) rarely go all the way. It is not nearly as cut and dry as if it were in your name and it may not be worth his time and effort to deal with it. I guarantee you that his attorney is, at best, telling him the same thing, that the trust PROBABLY won't hold up. How much is it going to cost him to find out for sure? And if it did hold up for some reason is he willing to eat that cost? 

    It allows you to negotiate from a stronger position as well. Since it isn't cut and dry and there is at least some risk that he will walk with nothing he may be willing to settle for much less just to be done with it. 

    Bottom line, I suspect you are in a much better position for having used the trust than had you not.

    0Reply
  • Vahe OhannessianPro Member
    OP
    Watertown, MA · Member since 2016 · 41 posts · 22 votes
    8y

    @Edward B. Good advice, thank you. Turns out this particular lender is an attorney himself with money partners, so his own legal fees are going to come easier. I feel I do have enough on my side to negotiate something because nobody wants to go through this process for $15k. We'll see.

    1Reply
  • Edward B.
    Investor · Midlothian, VA · Member since 2015 · 980 posts · 823 votes
    8y

    @Vahe Ohannessian,

    Ha ha! You fool! You fell victim to one of the classic blunders - the most famous of which is "never get involved in a land war in Asia" - but only slightly less well-known is this: "Never borrow from an attorney with money partners"! Ha ha ha ha ha ha ha!

    Slight adaptation from The Princess Bride. Classic. 

    Good luck to you, I'm sure it will work out fine. At least you are doing deals and stuff like this always comes up when you are doing deals. Part of the business.

    1Reply
  • Costin I.
    Rental Property Investor · Round Rock, TX · Member since 2016 · 1k+ posts · 971 votes
    8y

    What made you change your mind? After all, you signed a Loan Estimate weeks before, paid non-refundable deposit and a Commitment Letter (with a clear Termination of Commitment clause) days before closing, and closed on the property.

    Maybe your easier way out is to make another deal and use the loan/lender for another property and stick to your commitments. 

    0Reply
  • Mike Alt
    Rental Property Investor · Santa Monica, CA · Member since 2017 · 40 posts · 27 votes
    8y
    This is just my reading, but the laungage reads that the points paid on execution shall not be refunded to borrower. starkly different than owing the points if not closed.
    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    8y
    Originally posted by @Caleb Heimsoth:

    If this ends up being true, I need to get into the hard money business. Make a bunch of money with no risk, minus legal fees.

    issue here is over reliance on closing attorneys and not reading what your signing.  No offense to closing attorneys.. but they are busy people and I don't think they read every little thing.. they check title and basic escrow function.. they charge a set fee.. so I don't think its reasonable to expect them to operate as a hourly fee lawyer does.. maybe you guys that work in those states feel that way.. I don't know

    but in my experience the closing attorney would not be party to the agreement for fee's between lender and borrower.

    Although I can see both sides of this argument.. you have a borrower who is rate shopping.. and will drop lender A on a whim .. Lender A has to set those funds aside.. and when borrower says no thank you last minute like this.. they have damages.. they now have to go find a new home for the funds.. if they are like many of the new lenders they are paying interest on money in their fund..

    I harken back to my Timber days this is a little different but I had a nice timber contract signed get all my subs ready to go in Fallers  then the loggers we ran cut lines got the permits etc.. and land owner says don't step on my property I don't want to do this.. day before we start..

    I sued him in small claims for breach and asked for the max a the time 7500.  and judge ruled on the bench and we won..

    this small timber job was worth about 60k net to us.. so 7500 was a pittance of what we would have made but I was mad.. LOL.

    This may just be a good lesson that in real estate YOU as the borrower need to read and understand every document.. ONLY ask the attorney something if you don't understand it.. DONT rely on Attorney to do everything for you.. they are busy.. its not their job.. their job is title and closings.. at least that's the way I would see it.. Not enough revenue for a east coast closing attorney to go through all your docs for  you.  Just my opinion.

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  • Phil G.
    Real Estate Broker · MA · Member since 2013 · 361 posts · 297 votes
    8y

    Call me old fashioned, but seems to me if you make an agreement, you should honor it.

    0Reply
  • Mike Alt
    Rental Property Investor · Santa Monica, CA · Member since 2017 · 40 posts · 27 votes
    8y
    My second suggestion is just do nothing. They need to collect from you (expensive) so they would have to sue you. They are talking tough now hoping that it doesnt come to that. Do your best to be cordial, dont put anything more in writing and leave the table so to speak. if the time comes when they sue you, be ready to hire a lawyer. consider this bridge burned.
    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    8y
    Originally posted by @Mike Alt:
    My second suggestion is just do nothing. They need to collect from you (expensive) so they would have to sue you.

    They are talking tough now hoping that it doesnt come to that. Do your best to be cordial, dont put anything more in writing and leave the table so to speak. if the time comes when they sue you, be ready to hire a lawyer.

    consider this bridge burned.

    this is good advice.. right now its just saber rattling as it were.. it only becomes real if they actually file suit.. and get a judgement.. 

    and for 14k  lawyer or not.. this usually does not happen.. one would want to see also if there is an arb or mediation clause in that contract..  

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  • Vahe OhannessianPro Member
    OP
    Watertown, MA · Member since 2016 · 41 posts · 22 votes
    8y
    Originally posted by @Mike Alt:
    This is just my reading, but the laungage reads that the points paid on execution shall not be refunded to borrower.

    starkly different than owing the points if not closed.

    Mike, the "execution" it's referring to is my execution of the Commitment Letter. They're providing me a Commitment Letter so I can meet the terms of my P&S, and in return I'm signing the commitment letter agreeing to their terms, which in this case the document says that they've earned their 3 points upon my signing of the commitment letter, period. I simply missed it! There was never any mention of it verbally, by email, or any other form, and since this was my first time using a hard money lender, I never imagined such a hook could be included in what I was signing.

    0Reply
  • Vahe OhannessianPro Member
    OP
    Watertown, MA · Member since 2016 · 41 posts · 22 votes
    8y
    Originally posted by @Jay Hinrichs:

    Although I can see both sides of this argument.. you have a borrower who is rate shopping.. and will drop lender A on a whim .. Lender A has to set those funds aside.. and when borrower says no thank you last minute like this.. they have damages.. they now have to go find a new home for the funds.. if they are like many of the new lenders they are paying interest on money in their fund..

    ...This may just be a good lesson that in real estate YOU as the borrower need to read and understand every document.. ONLY ask the attorney something if you don't understand it.. DONT rely on Attorney to do everything for you.. they are busy.. its not their job.. their job is title and closings.. at least that's the way I would see it.. Not enough revenue for a east coast closing attorney to go through all your docs for  you.  Just my opinion.

     Jay, you're right on with both of your points above. While I wasn't "rate shopping", after signing the Commitment Letter my financial situation changed and I was suddenly without all the needed funds to close. So I scrambled and did a combination of seller financing and another private loan with VERY favorable terms, and no longer needed the hard money. Bottom line is that I do need to do a better job of carefully reading and understanding everything I sign myself.

    2Reply
  • Vahe OhannessianPro Member
    OP
    Watertown, MA · Member since 2016 · 41 posts · 22 votes
    8y
    Originally posted by @Phil G.:

    Call me old fashioned, but seems to me if you make an agreement, you should honor it.

    Honoring an agreement one makes shouldn't be considered "old fashioned" - it should always be fashionable!

    In my case I didn't fully realize the agreement I was making.  Now that I do, I'm going to be looking to the other party to negotiate another agreement, and potentially borrow to "honor" my agreement.

    0Reply
  • Alex Price
    Cleveland, OH · Member since 2018 · 133 posts · 59 votes
    8y

    @Vahe Ohannessian my concern would be the last sentence "By accepting these approval terms, you do hereby agree to pay for all costs and expenses incurred in preparing to close the loan, whether or not the loan is closed, not to exceed One Thousand Dollars ($1,000.00)." I would definitely consult a lawyer to make sure there is no ambiguity with that because it seems the fees would max out at $1,000. No legal advice given, definitely consult an attorney. 

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  • Vahe OhannessianPro Member
    OP
    Watertown, MA · Member since 2016 · 41 posts · 22 votes
    8y

    @Alex Price I have consulted a couple of attorneys, and they seem to think the last sentence about costs not to exceed $1,000 and the other paragraph about owing Points ($14,750) upon execution of the agreement are two separate things. I know what you mean because others have mentioned this point, and I was thinking the same thing when I signed (that i would owe $1,000 at the most), but it turns out legally they are separate things.

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