How to hold title in NPN purchase?

Question

Hi,

I'm working with a mentor to purchase my first NPN in OH.

We've done DD and are proceeding to purchase.  I assumed that the purchase would be held by his corp and my corporation jointly.  However, he just asked that I hold the note SOLELY in my corporation with us executing a JV on the side.

I balked.

I said that I wanted both corps listed as owners (I want him on the hook, to keep his "interest" focused)

He countered with listing the JV as owner, with me as the managing partner.

If I recall, this leaves me with the liability, too.  Am I correct?  If so, how SHOULD the purchaser be documented?

Am I correct that I'm going to be the responsible party?

Thanks!!!

The Paranoid Man

Bill B. · Answer

@Dion DePaoli @Mike Hartzog

Dion and Mike,

Thanks to you both for your contributions.   Dion, my mentor did outline all that you and Mike wrote.  My question is born on the Reagan Doctrine of "Trust, but Verify".   Having been previously burned by my inexperience, I am hyper-paranoid.  I can't lose this money.  But I also cannot let it just sit.

The mentor has skin in the game, but I was concerned that there may be greater exposure for which I was being made solely responsible.

In short, I don't know what I don't know.  I am learning a LOT.  And I've read a LOT.  But this, I fully realize, is the most dangerous time of learning this process.   I am very able and even eager to admit that I don't know.  My favorite question of my mentor is, "what questions that I should be asking have I not asked yet?"

I also am a check and double check type of guy.  So, while I have this mentor, and while we are building rapport and trust, as the stakes get higher, my desire to touch base with other experts skyrockets.   Thanks to @Joshua Dorkin, BP is here.  But BP is nothing unless people like both of you are willing to have these discussions with green horns like me.  Your contributions allow me to sleep a LOT better.

Mike Hartzog · Answer

Hi Bill - Your ownership of the note is documented first in the purchase and sale agreement, and then after the sale you have a mortgage assignment (which you will want to record with the county) and a note allonge.  If you have a JV entity, I think it makes sense to use that on all of the documentation.  The person who manages the JV entity is not a definition of the responsible party.  Your operating agreement should call out some of this type of thing, like ownership percentages, and the like.   The recording of the note assignment establishes the record of ownership, but it's really your operating agreement that binds the partners to performing from a financial perspective on the note after it has been purchased with regard to paying for expenses like professional services and such.  Hope that helps.

Mike Hartzog · Answer

@Dion DePaoli

Thanks for sharing that.  My information comes from my foreclosure attorney in OH.  They had indicated that I needed to register before they could file the foreclosure suit.  They also indicated that they believe "the rule is stupid", and the attorney is not making any fees for my registration.  Anyway, it was a couple of hundred bucks and my OH FCLs are moving forward so I am not too worried about it.

Dion DePaoli · Answer

@Bill B.

It is not clear what "liability" you believe you will face that requires the mentor to be joined.  There will be costs to enforce the security instrument as Mike stated.  There are some municipalities which have enacted provisions to require a vacant property to be registered upon the initiation of foreclosure.  The general idea there is to protect the neighborhood value, health safety and maintain some community integrity.   The municipality can enact the repairs or cure the violation if the Mortgagee does not take action and the costs can be liened against the property.  If the property requires substantive cures the municipality can demolish and the Mortgagee will get the bill.  In general the cost of abating the lien does not pass on to any foreclosure sale buyer or similar new owner but the amounts due will be paid prior to the Mortgagee collecting or the property transferring.  Not to cast judgement but a mentor who does not understand how to secure their role and profit doesn't seem to be a very good mentor.  In my opinion you have reason to be a bit concerned.  It is not clear, nor am I asking, what the mentor is contributing or teaching.  I am guessing since he/she didn't secure themselves this is all your capital at risk as a typical investor would secure their monies.  Any experienced NPL/NPN investor will point out like above you need more than just the purchase price.  How much is not clear without looking at whole picture but Mike's number might be a bit too low.  The idea there, plan for the worst and hope for the best.  For your sake, I hope you are not giving up large portions of the return and taking all the risk while someone pulled the wool over your eyes and really does not understand this asset class.  If issues arise, post them here on BP and get some comments for guidance.  I hope it works out the best it can for you.

Dion DePaoli · Answer

Mike, where are you getting that information?  The state code seems to explicitly state that the enforcement of mortgage debt is not defined as doing business and therefore exempt for registration requirements:Sec. 1776.86. (A) A foreign limited liability partnership shall file a statement of foreign qualification with the secretary of state prior to transacting any business in this state. The statement shall contain all of the following:

.......Sec. 1776.88. (A) Activities of a foreign limited liability partnership that do not constitute transacting business for the purpose of section 1776.86 of the Revised Code include all of the following:..........

(7) Creating or acquiring indebtedness, with or without a mortgage or other security interest in property;

(8) Collecting debts or foreclosing mortgages or other security interests in property securing the debts, and holding, protecting, and maintaining property so acquired;

What local was the subject property located in where you forced to do this?Is this being confused with the requirement to register a vacant property?

Mike Hartzog · Answer

Oh, sorry I misunderstood the question.  There are companies that provide agency for foreign (out of state) entities for the purpose of legal process service.  They must be headquartered in the state of OH.  I suppose a loan servicer could get set up with the state for this if they were located in the state.  My servicers are locates elsewhere.

Bill B. · Answer

@Mike Hartzog

Thanks.  I understand that FC requires an attorney and would be a good idea for DIL.

My question "Does this mean that the servicer is different from the FC agent?" was prompted by "BTW - If you end up needing to foreclose in OH, you will need to register your entity with the state as a foreign entity and get an in-state agent."

My understanding of a "servicer" was that they had all the licenses, brokerages, etc, required in a given state. That using a "servicer" was "covering my bases" and "staying legal".  That understanding led me to believe (perhaps erroneously) that the servicer would also be my in-state agent.  I understand that I'd still have to register my entity with OH, but that the servicer could also do the leg work for that registration.

Does that all sound correct, or is there another layer of abstraction that the "best and brightest" have engineered?

Thanks again for your time and help.

Bill

Mike Hartzog · Answer

You will need to hire a foreclosure attorney for a foreclosure.  I use them for DIL as well.  Your servicer should be able to handle loan modifications.

Bill B. · Answer

@Mike Hartzog

Will do!!!

Does this mean that the servicer is different from the FC agent?

If I get through this (without spending all the profits on multiple cases of Tums and Pepto Bismol) I'll be posting about the experience.  After the FC or workout, I plan on going Pro here on BP to exit.

Mike Hartzog · Answer

@Bill B.

My pleasure Bill.  Best of luck with the note.  BTW - If you end up needing to foreclose in OH, you will need to register your entity with the state as a foreign entity and get an in-state agent.  Ping me if that happens and I will give you the reference to the agent I am using, and the form to register.  Most states don't require this, but apparently OH is "special".

How to hold title in NPN purchase?

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