All Forum Posts by: Dion DePaoli

You should involve an attorney which is local to the Subject Property. Simply running out and obtaining templates to fill in can cause you harm if you are not familiar with important loan features. It sounds like you are putting together a lien on real property and some type of lien on the business. The business lien is a whole separate idea and may be without merit if the business was just formed to hold the real property.

Your cost will vary depending on the state of the subject property but you should be able to get it all worked out for $3,500 or less in most states I believe. That money will be well spent in contrast to finding out your documents are invalid or unenforceable where you can lose your entire investment.

"What are the lessons of a lifetime?"
"Exactly that"

I think one of the most important lessons to take away is that in this business of loans, Details Matter. I walk around with many catch phrases to express my points nowadays one of my favorite ones is inspect what you expect.

We had a deal where we funded the construction of a sub-division. The borrower was a builder and the property owner. We used a local title company and had our counsel review all documents and was in charge of draw payments. The assumption to some degree was there was a level of attention to detail that we didn't need to pay attention to because of the vendor services we had put in place as control points (title and attorney).

Long story short. We did a loan on parcel that was to be sub-divided and then released two lots to build models on with separate mortgages. We checked on perfection of the instrument but failed to read the legal description for the three liens (master parcel and two lots) and cross reference the survey in detail to ensure correct property. One loan attached to the wrong parcel for the lot and the description of the master parcel was incorrect leaving out a main value feature in the land, which was a lake. The lots for the models became intertwined in land that was not a part of our deal as everyone making instruments and reviewing them was using the incorrect legal description. One parcel was transferred amongst family members related to the property owner three times during all of this. The title company didn't catch it. Our attorney didn't catch it and it cost us some dollars. In the end, the buck stopped with us, we didn't catch it. It was a mess to unwind. We had to correct the title issues before any of the properties could be conveyed with clear title. Making it worse, other parcels were sold to builders who then sold to owners which also ended up being affected in regards to our partial releases which we couldn't issue due to all of the title issues. It took many months to fix all of this. Of course as all of this came to light, the borrowers didn't want to help cure any corrections and it became a fight over what the intend collateral was.

The local RE attorney firm we hired to help said it was one of the worst messes they had ever seen. (not a proud moment) I read through the master metes and bounds survey so many times it almost became memorized. It was eventually cured and made right. It was a bit of a tiring and bloody fight. I don't recommend trying it.

Hugo,

There is a ratio between risk and return. The investment you have made caries risk in default and risk in prepayment amongst some other concepts. Usually with less risk comes less return. An investor can decide on a less risky investment such as a Treasury where loss of principal is not high at all but the return (through yield) will also not be that high. In your investment, your chance of loss is not that high due to the amount of equity you have in the property. At 50% you have some pretty good insulation in equity to recover your principal and costs of enforcing the remedies provided in the instrument, usually through foreclosure in the event of default.

The general private money market or hard money loan market flirts around the 9.0% interest mark. Distressed cash flowing loan investments come out around the same number in most cases as well. Some of this is also capped on usury limits per state.

Can you find assets to invest in which deliver a higher yield and perhaps total return? Yes. But you will have to take on risk. An example would be purchasing a defaulted loan, which carries the highest discount usually and work to reinstate the loan with the borrower. In some cases that yield can easy enter double digits. The risk is you don't get to reinstate the loan and your costs to enforce the remedies provided can quickly 'use' the equity received through purchase price or discount or through the actual loan to value ratio on the real property.

In a financial planning sort of idea. If your investment can maintain at least 7.2% in yield, than in 10 years you will have doubled your money. Adversely, at 10% yield you will double your money in 7.2 years. (Rule of 72) Those have always been pretty decent return numbers to pursue.

It is always important to remember, pigs get fat and hogs get slaughtered.

@Bill Gulley

"A sheriff's deed doesn't grant warranty as the chain of rights and title conveyed were broken. Why? If all rights were conveyed by the owner to the lender, then why aren't all of those rights conveyed again? Because they weren't."

Upon sale and termination of equity of redemption, even in a Title Theory state, the borrower's equity is passed to the trustee upon foreclosure. That same bundle of rights, which is full not partial, is then conveyed from Trustee to Purchaser.

The Power of Sale, is a limited legal right not an equitable right but through the foreclosure process the borrower's equitable rights transfer in full and then the borrower's rights are extinguished.

There is no warranty because the sale process does not create a warranty to the title as there is no research done to provide such a warranty. An unnamed defendant with an interest in title could come forward from the past and that would not be grounds to rescind the purchase at sale. In addition, to warranty that title would create issues for other lien holders which are not extinguished as a function of the action.

So I would argue that the lack of warranty of title is not the same as insufficient or partial interest in title being conveyed. I as a Mortgagee turned REO owner can issue a warranty upon the sale of my interest in the property at my discretion.

"Once a mortgage, always a mortgage" is not contested in the conclusion of foreclosure. That has been practice for centuries. The mortgage does not convert into nor have rights to equity. The Mortgagee can not interfere with or clog the Equity of Redemption.

The only current occurrence that I am aware of that hints at brushing up against this issue is perhaps the NationStar debacle which I don't think was decided yet. In that lawsuit, amongst other complaints, the borrowers have contended the the determination of deficiency for a sale of real property which is not held in the open market can not be grounds to determine a deficiency. I don't believe that embodies the idea that you are suggesting though, Bill.

At the termination of the borrower's right of redemption, title passes in full to the foreclosing auction bidder. In the event that bidder is the Mortgagee, the bid is a credit bid and I believe that has also stood scrutiny under the law. The credit is considered tender for the transaction. So upon that event, the mortgage is no longer a mortgage as the credit is satisfaction of said mortgage (or DOT) and the action delivers a full set of title to the bidder, even if the bidder is the Mortgagee.

I am aware there is contest to these ideas around Mezzanine Finance structures but we are not dealing with that here.

I would also think the mechanics of the process provide and seemingly have upheld our mortgages (including DOT) is a mortgage by charge not by demise. (excluding mortgage by equity) The instrument grants only the needed legal right to enforce the obligation and nothing more. The legal right gives the Mortgagee the right to cause the foreclosure for breach of contract. The finality of the foreclosure is what terminates the borrower's equity and transfers it to the auction bidder in accordance to state law of redemption. If the borrower has no equity, due to its termination, there is no grounds to favor the borrower, I would think.

Let's agree to say that
1. Buying notes is not a good way to attempt to acquire properties (I'm sure we have predatory types who would disagree, but there are easier ways).

Agreed. To circle the wagons for the reader, a borrower has rights of redemption, which can not be circumvented or convoluted. That is the idea of "once a mortgage, always a mortgage". A borrower has an inherent right to redeem the obligation and actions from the Mortgagee can not interfere with that right. The equity, in discussion is "fairness" to that extent.

A buyer of a mortgage or deed of trust, can not deny the borrower the right to cure the breach of contract for the sole purpose of taking back the property. It seems simple enough but there is debate on this from time to time. Such in the case of a borrower making a payment that does not cure all delinquent payments or partial payment for reinstatement. Everyone has heard of foreclosure defense attorneys having the borrower make payments into escrow of the attorney which then becomes an affirmative defense of the borrower. Most mortgages and deeds of trust have language which do state the Mortgagee does not waiver its right to accelerate upon acceptance of partial payment. That has been contested and some borrower's have 'won'. Where the court forced reinstatement.

In those matters, the view point is in equity ("fairness") where the property may have sufficient value to pay the debt. Mostly why the Mortgagee "wants" it. Those types of pursuit as a Mortgagee can be challenged and the Mortgagee can lose the contest.

2. Lets agree that if you are going to foreclosure that you discuss the matter with an attorney who does foreclosures
Agreed. The attorney will have an understanding of what is equitable relative to the local laws and customs.

3. When speaking to that attorney get their opinion as to the equities that may be remaining and ask them what recourse a borrower may have and mentioning "courts of equity" as a theory in law, not a redemption right per se.
Newbie heads are blown, but give it a shot.

Again, for the reader I suppose, the conversation did come back full circle, well it never really left. The idea in the last couple of posts are circling around the notion that newbies do tend to pursue Non Performing Loans as a method of obtaining deeds to real property. The general and usual plan is always to fix and resell or rent out. In its simplest take-away from the last couple posts. It is not always that simple. I can't imagine you ever attend a Guru workshop and hear ideas like this be discussed but these are the ideas that are at the core of our industry. That said, these ideas speak to the validity of the plans that are created by those trying to enter the industry from time to time which, it is better to have the discussion than to get invested under some misinformation and find out you have to create a whole new plan.

My final thought, would be it is extremely difficult to invest in whole loans and not be diverse in your disposition. When you put only one disposition option in your plan, you will likely have issues with following your plan.

@Deon Wynia It is nice to see another Dion/Deon running around BP!

As for your last post, I would read the contract you have and around the place where a closing date is placed in contract look for specific language which states time is of essence and remedy to breach. Like with our Short Sale Contracts (as a Mortgagee/Bank) our contracts prevailed until such time as notice was delivered with reasonable time to act, like 7 to 10 days. There might also be adjournment language around the clear title section of the contract which provides for the date of closing to bumped until title is clear.

The point is, delays are not unusual in short sales and the servicer and mortgagee typically do not have contract language which puts them at risk of entering and losing a contract for lack of performance unless they desire for that to happen. The short sale addendums from the servicer may contain over riding language to the contract so ensure you review all of it.

@J Scott as I understand it, that language does not always create a date where performance is required and lack of performance is a canceling event. If the date is "of essence", the lack of action creates a breach of contract but most contracts do not provide for a remedy for breach. So what our attorneys have always had us do, mind you this is both general counsel and counsel to our mortgage servicers who administer our REO, that we send out a separate notice which restates Time is of Essence gives a reasonable time to cure and specifies the action that will occur if the action is not completed.

I know some of what we have done is preemptive steps in the event we may need to interplead a contract for escrow deposit. However, I think in most RE contacts that even though Time is of Essence is found it does not have language which gives a right to rescind the contract specifically to either party. And that is why you need the notice.

Not really an investor of second liens. @Dave Van Horn runs a fund which invests and trades seconds. He may want to chime in.

The list you have does indeed have the timelines it sounds like. GA and TX are non-judicial states. Other non-judicial states are similarly quick in time to foreclose with no contest from a borrower. Judicial states tend to be longer in time and the longest include NY, FL, PA.

Yes, you will have to observe the state specific rights of redemption which include rights for the borrowers as well as other lien holders on title.

In the US, all foreclosure is preceded by some form of Notice of Default which has a couple of different names. You have to put the borrower on notice they defaulted, allow for time to cure before proceeding with the remedies afford in the security instrument and according to state and local law.

The state of Georgia requires any investor who holds an interest in a Mortgage or Deed of Security to hold a state issued license. Point is, you will want to review the state laws around mortgage ownership to ensure you don't own something that you need a license for in a particular state. You can research those at the state department of finance on the web or by calling.

Dave can give you more insight on the likelihood of reinstatement of seconds and perhaps how to identify them. I believe his firm also sells loans which are already cash flowing, if that is really what you want and don't want the heavy lifting actions and risk associated with making the right purchase choice.

As I understand it in most states, the coming and passing of a closing date specified in the contract is not grounds for an automatic cancellation or void of a RE contract unless explicitly written in the contract. The event is a minor breach and the contract will still be enforceable until such time as one party puts the other party on notice, through written letter most of the time, that Time is of Essence and allows the states reasonable timeline to cure the breach.

In the situation with the OP, the contract is breached for lapse of time but not invalidated. A simple extension executed by both parties cures that breach and the same contract and terms can be used to close the transaction.

I have been through this many times as a Mortgagee. The Mortgagee will want a contract that is void of defects (breach) for their file. So an extension can be accepted or if both parties agree, they can vacate the previous contract and file a new one. This idea also feeds into a complaint by one party onto the other for Specific Performance on the contract. A suit could be brought for specific performance on the contract that is expired if no language voids the contract for breach of date.

Marie, I agree with what you are saying. I meant what you reworded (better than I) which is why I attempted to include the idea of the new occupant being treated like a occupant when I said "Buyer/Occupant". I should have used the word borrower not owner, that would have been better terminology.

Any party with an interest in the property including a tenant or a sub2 buyer or leasee, etc will require that their interests are extinguished in the property through foreclosure. That is also why unknown tenants along with specific named defendants are from time to time named in the action as well.

The point I was making that as a unapproved formally assumable Mortgagor, the Mortgagee will not likely share account information with you. Title to the real property is one thing. Mortgage account is a separate thing.

@Bill Gulley

I too am not following you because it seems to some degree you just repeated what was already said but differently and it is not clear and is confusing readers.

A full bundle of rights is granted to the Mortgagee if the Mortgagee is the recipient of a Certificate of Title, Sheriff's Deed or similar instrument and post any redemption period, if not already passed. Those rights are full in equity and law.

A Mortgagee, while a Mortgagee and not a Deed Owner, in other words prior to a DIL or Certificate of Title, Sheriff's Deed or similar does not have full equitable and legal rights in the real property. The Mortgagee has been granted a legal interest in the property. A Mortgage can take action on the real property which includes accessing and amending the real property only for the sole purpose of maintaining the security of the Mortgagee's interest. There is no equitable right for the Mortgagee to improve the property as the law states the Mortgagee is entitled to security as it was granted at the time of the instrument. So, "No", as Mortgagee you can't go in and build a deck or do home repairs but you can fix a hole in the roof to prevent damage or mow the lawn to prevent a lien.

I explained my use of the word mandate in the same sentence. Simply stated, there is no automatic revert of real property to the Mortgagee. The property can be sold at auction or redeemed. In those situations, the Mortgagee is never issued the full title bundle of rights to the property as those rights went to the auction bidder or redeemer.

So, @Wayne Brooks , if bought the mortgage and note for $65k and you sent the minimal bid to auction at the $200k (judgement) and nobody purchased the property at auction. You will get a Certificate of Title (Florida) which grants you legal and equitable rights to the property. The borrower's bundle of rights are set to expire at the end of the redemption period so they loose their equity of redemption, which terminates right before foreclosure auction in Florida or state specific elsewhere. You can do whatever you want to the property at that point, it is yours.

Bill, the commercial loan example about repairs didn't make much sense. If I have a mortgage on my property and I want to sell said property and a buyer wants me to make X repairs prior to sale, I am the title owner and can make repairs as I wish. The Mortgagee can not stop me from doing so. If you meant the Mortgagee was trying to sell the note and the Buyer of the note wanted the property to be improved, then I agree, the Mortgagee does not carry that right to cause those repairs.

The whole car title thing was also confusing. If you take back the collateral to any obligation, properly, then you become the titled owner of that property, whether real or personal. So if I take back a car, I own the car. If I see another car I like, I can certainly sell the car I own because I own it and buy the other car. If that is not what you meant, then you hopefully see how the passage is confusing.

I understand the point related to mortgages in equity, but I don't think some of the readers will. I also believe that is unique to a Seller financed mortgage held in equity. A buyer of that instrument would deliver a cash value as consideration and the mortgage equity would be a true mortgage for that Mortgagee.

Again, some of this is a bit too high level for some of the readers who are still trying to get an understanding of when they do and don't get title from a simplistic standpoint.