An excerpt from Vol. 2 of Be the Better Broker.
“I can’t believe my best friend/sister/mother/cousin (etc.) did not work with me!”
This is a common complaint in the industry. But you may want to be careful what you wish for.
If they went another path, you may have dodged a bullet. We humans have a bit of a blind spot (or spots) when we work with people close to us. It is difficult to treat those closest to us the same as we treat clients, and despite what you might think, we don’t actually treat this special group with greater care and due diligence; instead, we tend to treat them far more casually. We deviate from standard policies in an effort to keep it “simpler”—all the while setting a course towards devastation.
How can a simple purchase transaction from a lifelong friend or relative nearly cost a top-performing Broker a lender relationship? Read on.
This all happened to a friend of mine. Let’s call him Bob.
The seeds are planted on day one of the application. The standard operating procedure is as follows:
- Take in a complete application verbally—check.
- Send an email with the client agreement—check.
- Send the complete list of required documents—check… sort of.
Bob knows to ask for every possible document up front, and usually does so with a very comprehensive email list much like the one in chapter 74 (Volume 3). But Bob makes an exception and edits out the request for the picture ID and void cheque, plus a few other small standard items, all in the name of keeping it less cumbersome. After all, Bob sees his cousin all the time and knows his situation.
Never abandon your process in the name of “simplicity.” It will backfire. Maybe not right away, but…
In this case, the property itself steals the focus from Bob’s omissions. The subject property is a former co-op building converted to strata. The first insurer (it’s also a high-ratio file) still had it recorded as a co-op. The building issues are resolved over a week of back and forth with appraisers, insurers, strata management, Realtors and clients.
Then the pressure is on to get the most recent year’s taxes filed for updated income data.
This focus on getting taxes filed takes attention away from the detailed review of the job letter and paystub provided by the client’s new employer.
How many moving parts are there so far?
- A super-hot real estate market resulting in five other offers initially on this property = high pressure on clients and Realtor as well.
- Co-op/strata conversion.
- Appraisal ordered by insurer… ultra-slow response by appraiser.
- Applicant income taxes not filed for previous year.
The request is made for the dreaded extension—in a super-hot market.
Extension (number one) is requested and by some miracle, received. But the insurer remains unsatisfied with resolution of the co-op/ strata issue and declines the file.
On to a new lender, and to a new insurer. The second insurer does not even bring up the co-op conversion issue. No problem at all, except that they also require a new appraisal.
While awaiting the results of the second appraisal, the client’s income tax filing is confirmed with no taxes owing.
Bob is making headway.
And then the second appraisal comes in $12,000 below value.
Bob is now forced to submit to a third lender, as the second lender cannot “un-see” the appraisal and will not order a second opinion, or send the file to a second insurer.
No lender has yet reviewed the income documents in depth, as they have never gotten that far into the underwriting process. And Bob still has not gathered the ID or the void cheque. He has bigger fish to fry.
Onward to the third lender—and the third insurer—of the three that exist! The tension is building. And the Realtor is stressing an extra notch now too as we trigger date extension request number two.
Three more business days.
Appraisal number three is ordered by the new insurer. Value is supported!
Late afternoon on the final day to remove conditions, the value is on target, and it’s just a matter of signing off on income.
The client has started a new job just three weeks earlier, previously BFSfor six years in the exact same industry—a very reputable local employer. Bob has even called the employer directly in advance of the offer being written, just to confirm employment details, and specifically to confirm that there is no probation period. Bob is confident.
Finally the underwriter and Bob turn their focus to the income documents.
Paystub is payroll on diskette.
Employer confirms ADPpayroll registration is imminent, but this is not good enough for the lender, and at 6:00 p.m. on a Friday the lender conditions for a bank statement to verify pay deposit of the first cheque.
To go firm, or not to go firm…?
Bank statements are in hand within minutes—which is great. A closer review of the statements reveals a deposit on payday of a cash deposit amount $143.75 lower than the paystub indicates. Cash? The wrong amount?
Long, deep breaths.
There is a story though… the employer genuinely paid his (significant) staff payroll with cash due to a banking snafu, and the client kept a little cash in hand as pocket money for the weekend. It was reasonable, but still a bit ridiculous.
Regardless of the story, a Broker’s professional advice at this point, pushing 7:00 p.m. on a Friday evening with hiccups like these in play, with underwriters all having gone home, must always be: Do not remove subjects.
With any other client, there is no way subjects would be removed. What does Bob say?
“Go ahead—I will get it done.”
Bob. The jackass. Only for family does a Broker make such a bad move.
Nothing can potentially jam you up quite as much as sincere belief. What you believe matters, but what the lender believes matters more. The lenders are the ones subject to a possible subsequent forensic review of the documents, and thus what the auditors will believe is the gold standard.
Monday morning arrives, and with it an explanation and apology from the employer themselves directly to both to Bob and to the underwriter.
The lender signs off on income, conditioning that the next payroll deposit be clearly documented. Luckily the timing of completion allows for one more payroll deposit by just one business day. Cutting it close, but looking good.
Deposit from ADPdone.
Taxes filed and paid.
Just two more documents: the long-neglected driver’s licence and void cheque for the payments.
When he sees them at this late stage of the proceedings, Bob’s spleen shifts, kidneys cavort, intestines entangle, heart hurtles into throat—no…no…no…
An out-of-province driver’s licence—this is not super scary in itself, but why?
A void cheque with the same out-of-province address—getting scarier now.
“Hey, I know you have been living in BC for a number of years now. What’s up with the licence and the cheque and this other address? Have you got a second life I don’t know about?”
“Oh that is my old house.”
“Um, as in old-and-sold house? Or as in old-house-you-still-own house?”
Bob had, way back on day one, also deleted some other standard text from the “documents” email sent to every other client ever, including a request for “mortgage statements for any other properties owned in your personal name.” You know, just trying to keep the list uncluttered and simple.
Bob has known this guy for decades and never had another property come up in conversation.
“It’s the house that my first wife and I bought years ago; I kept it after the divorce.”
Three business days to completion.
Sure there was like a 15-year gap when Bob and his cousin did not really see each other or chat—living five provinces apart will do that. But an ex-wife?
The lender (luckily) agrees to condition for a statutory declaration confirming that the client is not responsible for paying any support payments. One bullet dodged.
Got a lease, mortgage statement, confirmation of property taxes?
No, yes and yes.
As it turns out, the tenant has been there for three years, the lease long ago expired, and is currently being a tad difficult to deal with over some minor issues, and getting a new lease signed is not going to be so simple.
The file debt services without the rental income. Phew! But…
Lender: “We are concerned about this non-disclosure of a rental property.”
This alone could be enough for them to punt the file from their queue, and potentially punt the Broker that submitted the file as well. With two days left to completion, there would be no way to get a 95 percent LTV file approved, instructed and funded—not one with this many wrinkles. Besides, there is only one insurer in play at this point as well.
Bob explains to the lender that the root of all of this mess is him, his own failure to request complete documents up front in an effort to make things easier on the client, combined with Bob’s failure to review 100 percent of documents up front, as he does on every other file.
The lender, based in no small part on the hundreds of trouble-free files submitted by Bob over the previous decade, agrees to fund the file.
A hail of bullets, all dodged.
Keep in mind that this all started with Bob deleting a few sentences from an email to try to make things less stressful for a relative—as many of us would also do with friends and family.
The moral of this story: To make it easy for the client at the start is to make it a nightmare for all involved at the end.
When working with family and friends, be all business all the time all the way through the file—always. Put your Broker hat on until the file is complete. Create a firewall between friendly banter and Broker/client conversations.
The key is to be consistent.
And through a file like that, you need to take immediate ownership of your mistakes, own them fast and get past them fast. Focus on the solutions, not the errors. Never lose sight of the finish line.
Be relentless like Bob was, only better.
And ultimately you just might be better off referring your close friends and family to another trusted Broker, one who does the same with their friends and family for you.