Detroit, Michigan, January 30, 2015
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.
After a 4-year court battle to obtain title to a foreclosed Florida condo, a Florida State Appellate Court for the Fourth District ruled that Bank of America must restart the entire foreclosure process from the beginning because of a clerical error, namely, an incorrect property legal description. (Case No. 4D13-4066). On the same date, Florida’s Daily Review quoted one bank attorney involved in a similar case as saying, “It was a case that should have never happened”. Famous last words.
Investing in real estate mortgage notes and flipping properties can be financially rewarding. According to numerous “real estate investing” or “note-buying” websites (A Google search of real estate “note-buying” prompted over 19 million results), it’s even “fun” and “easy.” Perhaps it can be, but not without “work.” 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 in order 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 the implications of invoking certain loan 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 any and 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.
- Make sure the entity acquiring a note or property 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 comply with federal and state laws.
5. Expect ‘push back’ and 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.
About the Author: Since 1990, attorney David Soble has represented lenders, loan servicers, consumers and business owners in real estate, finance and compliance matters. For over 24 years, he has been involved in thousands of real estate transactions and has successfully negotiated and saved millions for his business and consumer clients.
Disclaimer: You should not rely or act upon the contents of this article without seeking advice from your own, qualified attorney.