According to numerous “real estate investing” or “note buying” websites, (a Google search of real estate “note buying” prompted over 19 million results), real estate investing is “fun” and “easy”, which it can be, but not without “work”. Proven Resource managing attorney reviews important steps investors can take to protect their investments.
As seasoned real estate and note investors know, buying real estate notes and distressed property can be a great source of income, but as in the Bank of America matter above, it can also be a source of problems.
Here are five things real estate and note investors can do to reduce headaches before rushing in to acquire income-producing commercial or residential properties.
Audit the Loan File
It’s good business to have an attorney or compliance professional review loan documents before purchasing a note. Any legal defenses that a borrower has against a lender, they can have against the loan assignee or note buyer. Have a professional review the loan documents such as federal loan disclosures, deeds, legal descriptions, opinions on potential title defects, verifying back property taxes, and IRS liens. Note buyers want to buy a note, not a lawsuit.
Understand Implications of Invoking Provisions
For instance, in commercial loans, it’s common to have provisions for an Assignment of Rents. This means that the note holder can require tenants currently at a property to make payments directly to the investor in the event of a landlord borrower’s default. This sounds straightforward until one considers that in most jurisdictions, note-holders who exercise the right to collect rents become responsible for property repairs even when the investor does not yet own the property. Tenants could withhold rent from the investor until prior neglected repairs, such as a roof repair, are addressed. It can be quite costly, especially when tenants in distressed properties often request rent abatement.
Don’t Ignore Title Insurance
Note buyers usually have three options to make their investment profitable. If they can’t modify an existing note, taking a deed in lieu from a property owner, or initiating a foreclosure action are the only ways to take legal title to sell a property. In both instances, having title insurance is very important. Taking a deed in lieu from a borrower without having title insurance can be folly, since all liens on the property will be transferred to the grantee. Starting a foreclosure action without knowing what’s on title could expose the property to IRS liens that affect the investor’s clear title. At the very least, perform a title search.
Ensure Entity is in Compliance
Ensure Entity is in Compliance with state and federal law before taking any action against a tenant or borrower. For instance, evicting a tenant without a recorded title interest can be legally challenged. It’s the same for investors who issue notices of loan default. Recording one’s legal interest in a property is paramount. It’s also important that incorporated investors register their business with the state in which their investment property sits; otherwise, their authority to enforce provisions concerning their own investment can be challenged. Finally, make sure all collection and default notices follow federal and state laws.
Expect Time Delays
Making properties profitable or collecting timely payments does not happen right away. True, there are times when a borrower agrees to a loan modification that brings themselves current or even refinances off the note, but these instances are uncommon. Instead, anticipate little, if any, tenant or borrower response to correspondence and prepare for eviction, foreclosure or even bankruptcy actions.
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