In North Carolina Real Estate Lending Transactions, Let the Borrower Beware!

In North Carolina Real Estate Lending Transactions, Let the Borrower Beware!

Sometimes an investment in real estate pays off handsomely, and sometimes it doesn’t. A disappointed or defrauded investor may look to a lender to recoup losses, but such a strategy will not work in North Carolina.
In 2006, a group had invested in Grandfather Vistas, a real estate development in Caldwell County. Approximately 1,000 acres of land were purchased for $10.9 million, which Infinity Partners, LLC, Infinity Real Estate Partners, LLC, Source One Communities, LLC, Prudential Source One, LLC, and Peerless Real Estate Services, Inc., planned to subdivide into one-acre retail parcels for resale.

The purchase was financed. The developers sold about 60 10-acre lots for $500,000 each (“the founders lots”), with contracts guaranteeing the developers would repurchase each lot for $625,000 within one year.

The developers also agreed in the contracts to pay the purchasers’ interest from closing until the repurchase. The purchasers agreed to obtain fixed-rate 30-year loans, the interest rate not to exceed 7.5% with a loan-to-value ratio of at least 90%. Following repurchase of the founders’ lots, the developers planned to subdivide the lots into one-acre retail parcels for resale.

The appraisers used by the lenders valued every founder’s lot at $500,000, regardless of the lot’s specific qualities or location in Grandfather Vistas. That was the exact minimum amount needed to meet the loan-to-value provisions of the purchase contracts. The actual value of the lots ranged from $40,000 to $81,000.

Little if any of the money raised from purchases of the founders’ lots was ever invested in Grandfather Vistas, and by 2007 all development activity ceased. None of the founders’ lots were ever repurchased from the investors.

In 2008 the investors (“plaintiffs”) sued both the developers, and also the lenders: First Charter Bank of North Carolina, Wachovia Bank, N.A., and Sun Trust Bank, Inc. (“the lenders”) for fraud, fraud in the inducement, negligence, negligent misrepresentation, conversion, civil conspiracy, and unfair and deceptive trade practices (“UDTP”), pursuant to Chapter 75 of North Carolina’s General Statutes.

On the lender defendants’ motion for summary judgment, the trial court dismissed the plaintiffs’ claims for negligence, negligent misrepresentation, and UDTP. The plaintiffs appealed the trial court’s ruling. Specifically, they claimed that the lenders owed them a duty to provide accurate appraisals of the founders’ lots, and that the lenders’ obligation arose out of a fiduciary duty to the plaintiffs as borrowers.

The Court of Appeals of North Carolina ruled that a fiduciary duty may exist between a bank and its customers, but only in certain rare circumstances. The purchase of a home is not one of them. Appraisals and underwriting are for the benefit of the lender, not the borrower, and the bank owes the borrower no duty to ensure that an appraisal is accurate. The North Carolina Supreme Court ruled in Dallaire v. Bank of Am., N.A. __N.C. __, S.E. 2d (2014) that a borrower cannot establish a claim for negligent misrepresentation based on a loan officer’s statements if the borrower fails to make reasonable inquiry into the validity of those statements.

The Court of Appeals also rejected the plaintiffs’ reliance on the Mortgage Lending Act, even aside from the fact that it was repealed effective July 31, 2009, finding that the Act was only intended to protect those borrowing to purchase a home, whereas the plaintiffs were purchasing the founders’ lots as investments.

In sum, let the borrower beware. When investing in real estate, when the purchase is being financed, it is the borrower’s obligation, not the bank’s, to validate the accuracy of an appraisal.

If you are involved in a real estate transaction, whether you are selling, purchasing, exchanging, or leasing residential or commercial property, we can help you avoid problems that can cost you money. To contact an experienced North Carolina real estate attorney at the Tatum Law Firm, call today at (704) 307-4350 at our Charlotte office, for a free consultation.