Hard money lender collects fees,goes on vacation,has no money to close

With all the things that could go wrong in Real Estate, you would think that when you have a closing scheduled everything will run smooth. 

We found the perfect house for the buyers, a couple, no kids, grand kids who visited often, husband has a hobby of working on cars, and they were looking for a smaller home and a big yard their grand kids could play in.  What we found was a nice 2 bedroom house, 3 car garage on a lot over a half acre in a well maintained neighborhood.  It was also a foreclosure.  The problem was, the buyer had poor credit.  He went to a local licensed lender with hard money contacts.  

Since it was a 2 bedroom foreclosure, the buyer got a great price on the accepted offer.  The hard money lender looked over the contract, down payment, set the terms and figured he could not loose money on the deal.  The house passed inspection and we were set to close.  All we needed was the lender forms signed and the money transferred at closing.  This appeared to be a done deal.  One little problem. 

The 2 bedroom house was in such great shape another buyer submitted a secondary offer which was accepted.   Now you have to be careful.  The Seller's Addendum may have a clause saying they have the right to cancel the contract at any time.  I have never seen an Asset company cancel a contract where the Buyers fulfilled all their obligations, and cannot say if they have the ability to legally cancel a contract.  This is an area no one wants to test. 

As the closing drew closer the Buyer deposited the earnest money with the listing agent and the fees with the hard money lender.  At this point it is important for the Title Company to work directly with the Lender, no matter what the circumstances are.  I can't be certain of all the details, but these professionals ensure everything comes together in the right way at the right time.  Then it happened.  Instructions to transfer the money went out to the lender, and nothing happened. 

A lot of these hard money lenders are one person operations.  The lender went on vacation, the money never made it to closing, the Asset manager for the Seller canceled the contract and took the secondary offer. 

Most of the time we can work out a later closing.   The asset manager agreed to give the buyer a few extra days if they showed good faith by depositing an extra sum as earnest money, which the Buyer did.  This bought us a few extra days.  The hard money lender could not be contacted or located.  It doesn't look good when the lender drops out of sight.  The Buyers were faced with a decision.  After a week they had the choice of signing a mutual release or face the possibility of loosing their earnest money.  They signed the release.  The Buyers also lost the loan origination fees for both the local licensed lender, who agreed to apply it to another loan, and the fees paid to the hard money lender who decided to spend it on a vacation. 

If you are considering a hard money loan do as much as you can to protect yourself.  Look over the contract and question anything on it that may look ambiguous, in other words, may be understood in more than one way.  When in doubt, have an attorney examine the lending contract and explain it to you.  Chances are an attorney may charge less to review the loan documents and title that the cost of the up front fees for a hard money loan.