- July 8, 2019
- Posted by: august19
- Category: Podcast
The real estate landscape is constantly shifting. Attorney Franco Barile from Sottile & Barile discusses shifts in the legal landscape in federal states particularly in Ohio, Michigan, Indiana, and Illinois. Having built the firm on their bankruptcy and collections practice, they started in the real estate space in 2016 and now consider themselves as a unique one-stop shop for real estate legal work. With shifts in the legal landscape of the said states, more and more people are looking into Sottile & Barile’s unique process. Don’t miss this episode as Franco dives into how they navigate the legal world of some problematic states and how you too can emerge unscathed amidst all the shifts.
Listen to the podcast here:
The Shifting Legal Landscape Of Real Estate with Franco Barile
We are thrilled to have with us an attorney that is probably the belle of the ball when you talk about the note investing world. Franco Barile is from the firm of Sottile & Barile. They are based in Ohio but licensed in Michigan, Indiana, Ohio and now Illinois, for those of us brave enough to venture into Illinois for our deals. Welcome, Franco. Thank you so much for joining us. We have so many questions about the shifting legal landscape in Ohio and Indiana. I didn’t even realize it’s shifting that much in Indiana. Chris is such an avid follower of all things legal that he frightens me on a daily basis about all the new and terrible things that are underway. We mostly have asked you here to talk about some of the new things that we all need to know about. We also have quite a large group of our regular readers who would love to have some time to ask you questions too. Could you please start out and let us know a little bit about your firm and about how you’ve been serving note investors all these many years?
Thank you for having me on. I appreciate it. My other partner is Tony. We got together in 2015. We had a mindset of doing bankruptcy and collections. Tony was very good at the bankruptcy side. I was very good on the collection side. Between the two of us, we had extensive years of foreclosures, forfeitures and doc preparation on the real estate side. As we built the firm on bankruptcy and collection practice, we started back into the real estate world in probably about 2016. As we started that, it has grown enormously. Sometimes it’s hard to get a law firm and attorneys. At times, it’s probably hard to get Tony and me as well, but we try to respond as quickly as possible. With our experience, we cover a good swath of that Midwest where you can come to our firm and if you’re in Indiana, Ohio, Illinois, Kentucky and Michigan, you’ve got a one-stop shop. We can’t do it all.
Your states are CFD heaven. Do you find that most of the work that you do is contracts for deed as opposed to conventional notes?
We’ll see the conventional notes on the institutional side. On the investor side, we’ll see quite a bit of the CFDs. You mentioned Indiana and Ohio. Ohio is going to be your state where things not only are changing. I think they’re going to change.
I’ve been rallying against Ohio for years before they even did anything. I had a thing about them. You and Bill Griesmer are the only good thing about Ohio, as far as I’m concerned.
As I always say, Ohio stands for only headaches in Ohio. Sometimes on your website, it mentions Wisconsin your federal. Is that bankruptcy? What is that?
Yes. That’s the bankruptcy. You can add Wisconsin, the District of Columbia and Colorado as well. Whatever’s on the website, those are the additional states where we can do federal bankruptcy court work. My partner, Tony, has also created a national bankruptcy site as well. If anybody needs proof of claim in any jurisdiction in the United States, he’s created a department that solely does that work. If there’s a claim needed or certain other documents, if you want to do a Bankruptcy 101, he’s your guy. We do that as well. He’s created such a big department that he’s seen that national side of bankruptcy work takes off. It’s a nice niche. If you need a proof of claim, you’ve got it.
What do you charge for a proof of claim?
I have to get Tony on the line. We should probably give him a call.
I thought a proof of claim was a fairly simple document. The first time I saw one was 30 pages. Is that normal or is that lawyers proving their worth?
Consider them as typical forms. When you’re getting them done by a law firm, especially Tony and his people, they have all the experience in all these jurisdictions to know some of the small things that some of these courts require. The forms, in and of themselves, are pretty standard. However, there are certain nuances in each of those jurisdictions that you have to watch out for. Tony marketing that side of it is the true marketing side. You can do it yourself but if you do it wrong, it’s hard to go back and fix that.
I don’t know what Ohio’s motto is but it should be something along the lines of, “The quagmire or quicksand of every good business.” I’m aware, although I don’t buy in Ohio, that the deeds there, unlike any other state, has strict requirements on the margins on the deeds. You have to write down the prior deed registration, date of recording and instrument number. They are looking for ways to mess you up.
There’s quite a bit you have to put inside these deeds. Michigan is a little tough too in getting the deeds all formatted. A lot of states have those standard formats, but Ohio requires quite a bit. What they do is that the clerks, the actual recorder’s office, find some errors and ship it back.
I picture them with their rulers like, “Pin your margin on the first page at the top.”
I had one rejected in Michigan because the company that created the deed, the individual used their initials than their last name. They rejected it because they don’t allow somebody use initials. The person used CJ Smith. They rejected it because he has split Charles J. Smith. It’s something like that that they sent it back for.
You’ve got to be careful too with those previous deeds. You have to match them. The grantee of that previous deed must match the new grantor of the deed.Get your proof of claim done by a law firm. You can do it yourself but if you do it wrong, it’s hard to go back and fix that. Click To Tweet
That was just the person who was creating it. In the upper left–hand corner it says, “Please return to this person.” That’s where it was, not the actual transfer of the person’s name but the person who was creating the document. I use Orion MetaSource out of Texas. This person down there uses his initials on everything. They rejected it because of that.
I would call that rare, but if it’s happening to you, so it’s not so rare.
It varies a little county by county. I don’t know for sure, but I assume that Cuyahoga County is way more difficult than a lot of people.
For me, it’s easy because we get to drive there. If there are any errors, we can fix them right there. It’s easier for us.
Speaking of Ohio, why don’t we roll into some of the things that are going on and some of our favorite states? There are some big changes going on in Ohio, especially with the contract for deeds.
There was a bill in committee. It started in 2017. It was a very low-level committee. Somebody within the State Senate said, “Let’s bring this up. Let’s at least try to fix contract for deeds.” What ended up happening is it got stalled. The stalling picked up steam when there were some issues in Cincinnati. The City of Cincinnati passed an ordinance that pretty mirrored that bill that was put forward in the Ohio legislature in that committee. It was a bipartisan bill now. They came up and said, “We don’t want to allow Cincinnati or Youngstown to create ordinances. We want it up to state law.” They got a bipartisan bill together and that went through. It was put into the house and it’s slowly making its way up. I do believe that bill is going to pass. What it does is it eliminates land contracts or the reason to do them. You might as well lease the property and just do it as a tenancy. What it does is the owner of the property who’s giving that land contract for seller financing has to pay for property taxes and insurance. They have to get an inspection before giving a land contract to any subsequent borrower. They must go to the city to make sure there are no violations. There are so many different things that need to be done. It eliminates the reason to do them.
Land contracts were good because it helped the borrower secure home ownership in a short period of time that they couldn’t secure with the traditional lender. That’s going to go away, also their capping interest rates. There is no provision yet regarding retroactivity. All of the land contracts that are in place now, these new laws shouldn’t apply. We don’t know yet until that bill passes. I saw some provisions within that new update that makes me believe they might make portions of it retroactive. There’s something to look out for. The reason they tried and it didn’t in Cincinnati was because there was a certain lender down there that had a lot of land contracts. The legislature believed that they were duping the borrowers. If you look at the land contracts, they look pretty standard. They look okay. It became a problem with that area and things just blew up. From that, the state said, “Let’s create something that’s going to protect the whole state.”
It’s interesting because in some of these land contracts, you came back to me where I was going to do a cancellation and redo the land contract because one of the things I would do sometimes is reset that five-year clock or that 20% interest in down payment.
They call that the Chris Seveney move. You do that at times.
You mentioned that you wouldn’t advise putting something in place on a land contract. If you did, you’d want to follow that rule. That throws that out. You quickly touch upon a lease option. Do you want to explain what a lease option is?
It’s two separate documents. You have your standard lease, and I’m sure you’ve seen enough leases in your days, and there’s a separate option to purchase. What that option of purchase does is it gives that tenant an option to purchase at a later date. You will put a date in there. Sometimes it’s a five-year term. You can take a down payment and decide whether that down payment applies to that purchase price, let’s say in five years, or it’s just considered a payment towards the option. They can also use those lease payments towards that purchase price. What it does is you don’t record the lease. You have the same rules as a landlord using a lease with an option to purchase. You own the property so you have to pay for taxes and insurance. You have to make sure you maintain the property. You become a landlord. If you understand the responsibilities of a landlord, that’s what a lease with an option of purchase would do.
In the past, there’s always been the law and the contract that you write. You were able to put things in a contract. As long as someone agreed to them, it didn’t matter if they followed the letter of the law. That’s what we’re saying is happening here. There’s more flexibility to write contracts that require that borrower to pay the taxes and the insurance.
They’re gone. The one final provision of that bill is if the borrower is represented by an attorney, you can waive some of the provisions. How many borrowers are going to get an attorney to get into a land contract? That could be the push for the borrower. If the borrower wants to do a land contract, you can tell them, “You can go see an attorney. We’ll do one for you,” and then you can negotiate a little more.
By law, do the payments on the lease go towards paying down that amount or could it be kept separate? I’m guessing that you have to put a price on that lease option. You have so many years to buy it at this price.
That option gives you the exact purchase price of that house. You have the option to purchase it at a certain time. If the clock runs on a certain date and ends on a certain date, in between that time, the tenant has an option to purchase it. Standard in those contracts is the lease payments will apply towards that purchase price. That down payment doesn’t have to, but those lease payments normally standard do.
Are those lease payments, in essence, an interest-free loan or can they represent an interest rate also?
No interest rate would be put on that.
Let’s say you had 50 months to buy something. You had $1,000 a month. You wanted the price to be $50,000. At the end of the day, you’d have the lease option to be $100,000 because if they made the 50 payments at $1,000, at the end of the day, it’s $50,000. Is that correct?
Yeah. You can also portion some of those lease payments as well. At least you have to be able to portion some to the purchase price. You’re looking at ideas that are not what you would want to do. With the land contract, you’re giving that borrower the right to own the property, equitable rights on the property. They’ll take care of the property. They wouldn’t call you for any maintenance issues because they are supposed to take care of that property. In the leasing with an option to purchase, you also have to make sure that you are taking care of that property. When you talk about notes, mortgages and note buying, that’s usually a separate world from being a landlord.
The only advantage of a lease purchase option over a lease, where you’re never going to give it to them, is that you get the down payment?
That would be the point of getting that down payment. It’s how much down you want to consider to take can be negotiated.
If you’re never going to make anything on this other than the down payment, sell it to them at all. It’s a rental.
In that option of purchase, you get a down payment. You wouldn’t get that in a lease. In a lease, you would just pick a security deposit, which applies at a lease and the monthly payments. With that option of purchase, you’re telling that tenant to put more considerable money down. It does not have to apply towards that purchase price for the use of the option.
Something like the associate protective legislation for borrowers seems insane. You can have people put a big chunk of money down and it doesn’t buy them any equity in the property. Then they fail to pay their rent three months down the line. Isn’t that predatory to have taken a bunch of money from somebody right from the get–go?
The laws are changing so quickly, so they’re going to land contracts. Leases, the lease with an option and land contracts have been around for a long time, but a lot of things are changing. They’re starting to change the land contract side in Ohio. That bill is going to pass. When it does, it’s going to be difficult for people to enter into those contracts.
Do you think that once they realize that people are using this as the workaround, they will then start even making more rules about lease options as well?
Yes. They’re going to eventually go around to that. We’ll see. You won’t have to worry about this bill not passing for whatever reason because they’re making a big push towards it. The City of Cincinnati already has rules regarding land contracts. When you move outside of Cincinnati, you don’t have to worry about it. When you go into Cincinnati, you do. It’s very strange. I think that’s why they wanted to put this bill together and try to get it passed.
For lease options, the only time I would consider it and when I have considered it is if you have a contract for deed that may have to go through a foreclosure process, instead of spending $5,000 to $6,000 to foreclose. You don’t want to do a mod. You want to try and reset the clock on something. Then you can say, “Let’s cancel the land contract. I’ll give you a lease option, which still gives you the option to buy it in a few years,” which is the workaround for it. Most people aren’t going to do a lease option. They’d rather lease it or whatnot. Has anyone brought up the point that most banks don’t lend it under $50,000 and Ohio is not cheap to foreclose on? Eventually, nobody’s going to have home ownership on properties under $50,000. Investors are probably going to love it because the rent is probably going to skyrocket with this. People can’t get mortgages. It’s going to allow the investors to jack up the rent.
There are always consequences of what can come from a bill. I don’t know if they worry about those things. I think they look at one side of it and get the bill out there. It looks good. They’re trying to make sure that everybody can live in a home and not have to worry about predatory lending.
They can’t buy it at all.
It’s going to be a little more difficult. If you see some of these land contracts, they were intended to be short-term. You’re looking at five years. When I review these land contracts back in 2009, 2010, every single one of them had a five-year term. At the end of five years, if they couldn’t make their payments, you release the land contract and they’re on their way, or they get a deed and they got refinanced and they’re able to buy the house. Seeing these land contracts several years out, I don’t think it was intended that way. They look like notes and mortgages.
Isn’t that a big cost? I don’t think anyone anticipated after the crash in 2008 that it would be so ridiculously difficult to get a loan. Before the crash, it used to be that anybody with a pulse could get a loan. Now, you need a pulse and $100,000 to get a $50,000 loan.Ohio is the quagmire of every good business. Click To Tweet
It also used to be that people couldn’t buy a home because the interest rates were too high. Interest rates can’t go any lower, so that’s not the issue. You nailed it. People just aren’t able to get homes based on all the regulations, and they’re going to add a little more.
We have a question, “Has there been any conversation if there’s any retroactive about the land contracts over five years or 20% of having those be forced to either be converted into notes or just have those be retroactive to this law? Has anything regarding that specific grouping come up?”
No. As they’re putting this bill together, there are probably going to be some changes to it, but now I don’t see anything in there. I don’t know about the retroactivity. That would be a good point on that five-year rule. What statute are you looking at? I think they’re going to amend that statute and probably eliminate some of those issues and possibly shorten that timeframe. So far, I don’t see anything retroactive about it. I’m going to keep monitoring it and see how it’s going to play itself out. The current statute is still the current statute. If you do a land contract now, it’s the land contract of now. I don’t see any retroactive possibilities, but it’s not over yet.
Circling back to when we were first talking about what the new rules are for a loan or a land contract, you were saying that they have to check that the utilities and everything has to be up to date. Has it become the case that a property can ask that clear title on it to become a land contract property? We talk all the time about the way these quitclaim deeds get dealt out like playing cards. They got so much stuff on them. I have one in Indiana that’s got a judgment on it. That doesn’t even belong to the house. It belongs to another property owned by the same company that sold this to me. The house is in Gary. It’s got Hammond Code Enforcement liens on it that don’t belong to the Gary house. It’s on there nevertheless. I’ve gotten conflicting views from the title company that if I was selling that house, I would have to pay those judgments. Whether I do or don’t, my workaround is that I offered it on a lease option. I made the term long so that the judgments will expire. I don’t even know if that’s even correct.
The lien is going to last for ten years. The judgment survives for twenty. That’s the interplay. It depends on how old that judgment lien is. Title companies don’t like judgments either, so you might as well look at it as twenty years anyway.
Am I correct that a Hammond’s code lien on a Gary, Indiana property is something that I would have to deal with?
Is that against that seller’s exact corporate name?
I’ll have to check. We got the corporate name of the seller who deeded it to me. I’ll have to look.
If that’s who it’s against, it will follow the land. It will follow that company’s name.
As part of the land contract in Ohio, and I read it somewhere too, as part of the transfer, you would have to give a warranty deed versus a quick claim deed. Is that still on the table as part of this law?
Yeah. In the interplay between a general warranty deed and quitclaim deed, you’re warranting that there could be conferences, liens or something else, easements against the property. I don’t see those in court much. I think the bigger issue is going to be these liens that pop up on sellers’ properties. Those can follow that company around.
What about tax sale properties? Some title companies don’t want to touch those or only after a certain amount of time.
It depends. You’ve got to look at the state you’re in. Ohio is different from Michigan, which is different from Indiana. There are different ways of doing tax sales. In Ohio’s judicial, you shouldn’t have any issues. In Indiana, you’ve got two ways of doing it. One is judicially and another is through the treasurer’s process. That’s where a lot of tax sales happen, that non-judicial side. The state leaves it up to the purchaser of that tax sale to make sure they give all the notices out to the proper parties. One is being that first lien holder on the property if there is one. If they didn’t properly give them notice, that first lien stays on the property. That’s why title companies won’t touch that. Michigan has the same type of deal. They’ve got a judicial and non-judicial way. In non-judicial, you have to follow a lot of these different rules. If you don’t, those liens follow that property.
Is there anything else on Ohio? I’d like to roll over to Indiana as well. Indiana has had some changes in regard to the utilities, whether they stick with the property versus the borrower. The other thing I read, and I don’t know what happened to it, was similar to land contracts. If there was more than 5% or 10% equity in the property, it converts to almost like a note. What have you seen in Indiana?
The utilities have to become a lien. It’s the same with a water bill. Sometimes they’re not going to show up on a title report because they haven’t become liens or they haven’t been put on as taxes. Sometimes those liens would be put on those taxes. That’s why the taxes go up. It’s the same thing with a water bill that’s outstanding. It still follows that property. If you look at a standard homeowner sale where you go to live in the house, you’ve got to get that final water bill. You have to get all those final bills. That’s the big reason. There could be a bill outstanding that will not show up on a title report. It won’t show up anywhere. Those are the types that you’re going to see once you start buying properties. Some of these things follow the property. They can become liens. They can be attached to taxes. They come out of nowhere.
I’ve noticed in Michigan that the water bill does show up on the tax page. The tax page has taxes and utilities on it. I used to complain about my $2,500 water bill in Flint, Michigan. Chris got a giant water bill, so now nobody gets to complain about anything because it’s all about him, what happens to him and how sad it is.
It’s $9,000. It is nothing.
Was it $9,500?
I forgot. They told me it’s $20,000-something. That had me choke a little bit. In some of these Midwest states, the attorney who I use a lot for a lot of my regular corporate stuff mentioned he sees, in probably the next few years, a possibility called extinction of land contracts based on where governments are going in moving more to a little liberal side of things. I’m curious about what your opinion is on that as well.
I would agree. You’re seeing it now in Ohio. You’re seeing a massive change. That is going to continue. If something happens in Michigan, Ohio is going to take notice and Indiana will take notice. Once this happens in Ohio, the other states will take notice and look at them a little more. For us, Michigan is one of the easier states because there isn’t a lot of regulation behind it. The issue is whether you want to be able to go through forfeiture or foreclosure. At the time of the judgment of forfeiture, the borrower can pay that reinstatement or wait 90 days and in day 90, pay that reinstatement. If they didn’t pay for the last three months, you have to re-forfeit again. In Michigan, it’s quicker. There isn’t a lot of issues going through. I do believe these land contracts are going to be looked at the next couple of years. That landscape is going to change quite a bit.
Pennsylvania is hostile too towards them. Until the crash, all these funds got put together and bought all of these distressed little houses and the land contracts and all of them, that’s what’s caused all the issues. It’s been a few years of land contract experience widespread, particularly throughout the Midwest. Some people are incredibly successful. I see performing land contracts that are ten, eleven years old. People are still paying and doing well. They’ve been such a help to people who otherwise can’t qualify to buy a house.
That is a big difference between the ‘70s and now. You have these land contracts that were giving borrowers a lower interest rate or at least working a little better than the traditional lender, but they’re still going to get a home. Nowadays, you have people who can’t get that loan and can’t qualify. The land contract comes out and they say, “You shouldn’t have given them the land contract.” You can say that about cars and about anything. You won’t have a market for that type of product.
Is the law also on owner-occupied only?
This is just owner-occupied.
In Ohio, say I foreclose on a property and didn’t want to write this guy a note who’s going to use it as a rental because of the cost of foreclosure, could I write him a land contract? Does it have to follow all these regulations, or because it’s a commercial non-owner occupied loan, is it back to similar with a note almost and you don’t have to play by all the rules?
You’ve got to be careful with that commercial side. If you’re doing it on the commercial side, that borrower has to be renting that property out. If you’re taking money from a landlord, those rules don’t apply.
I’ve got my brain twisted thinking, “Set up an LLC for the borrower and have him do it.”
It’s always the intention of the money. It’s not so much the structure of it.
That’s what my other attorney tells me too. Here’s one of the things that I’ve seen in Michigan with laws too. I almost tried to play this card and was going to go unsuccessful. I was going to allow a property in Michigan to go to tax sale and collect the overage. When I did some research, I read that the overage in Michigan doesn’t go to the first position lender. The county or city or state takes everything on the overage. I see that’s also being challenged. Are you familiar with that law?
I’m familiar only a little bit. That’s the only part that I know about is that you’re not getting anything from tax sale. You can wait it out. I would assume that was a judicial tax sale. Your best bet is to get in there and at least see how much those taxes are and if they’re worth. If they’re not, you’ll be defaulted out. That’s one thing you’ve got to be careful with. Overall, you’re not going to get much in a tax sale.
I bought the note very low. It had about $7,000 in taxes, but the house was worth $20,000. I’m like, “Why should I pay the $7,000 in taxes? Why don’t I go to a sale? If it sells for $10,000, I’ll get $3,000 off the backend and make a few bucks.” When I was talking with the county, they’re very coy with what they’re saying. They said, “There is no overage.” I’m like, “What’s that mean?” They said, “The tax sale gets collected by the county.” That’s all they would say.
I have never heard of that. Does that mean also that if there wasn’t a mortgage on there, the owner of the house would not get the overage also?When you talk about notes, mortgages, and note buying, that’s usually a separate world from being a landlord. Click To Tweet
It’s nothing. They claim that they have so many.
How can they steal your equity in the house? These public servants are so principled about protecting consumers. How do they get to steal the money above and beyond what’s owed to them?
Let me research that issue a little more. I’ll shoot you an email. That’s an interesting issue. I’ve heard that before about the overages. There isn’t. I’ll take a look at that.
It can’t be normal because there’s a big guru who’s been teaching tax overage strategies where you find the people and you collect the overage for them and keep a piece of it yourself. He’s going crazy with this class.
When I spoke to them, they said 99% of properties sell for less than the tax sale value.
That’s no reason to make a rule that if they sell for more, you don’t get the money back.
It’s being challenged. I think it’s in the Michigan Supreme Court. Some of the bigger lenders are challenging it because they’re claiming that sometimes they may not have been notified and it goes to sale. It’s the only state I know of that it was ludicrous that if somebody loses their property to tax sale, everything goes right to that jurisdiction.
Someone says, “They steal your money in taxes in the first place. Now they want the rest.”
We have a question, “What utility bill stays with the property, whether it’s a note or CFD? It doesn’t matter if you foreclose. Do you still have to pay the taxes?”
Yes. It’s based on a lien. When you’re done with the sheriffs, you are the owner of that property. That water bill will always stay with that property. When you say it’s a CFD or a note or a mortgage, it’s whoever owns it.
Some people get worried about CFDs. They’re like, “Those water and utility bills are going to come to you.” It doesn’t matter whether it’s a note or CFD because you’re foreclosing or forfeiting getting that property back. They don’t get white.
With the foreclosure, you’re not paying them right away but you’re going to pay them later.
I’m pretty amazed that water companies specifically allow these massive water bills to accrue. They’ll let the person pay a small amount to turn the water back on. Their excuse is, “We can’t have people living without water,” but the electric company will turn your electricity off. It wasn’t going back on unless you pay them the entire balance. Why don’t they make them pay the full balance when it’s little, before it’s $2,400 or $9,500?
It’s habitability. You have to have water. Utilities are a little different. You need those too.
I had a funny interaction about my $2,500 water bill in Flint, Michigan. I wanted to show them a land contract and how, when the woman first defaulted, a land contract said that she became a tenant. Because they made a big thing about how she was a tenant, the water bill would follow her. Since it was a land contract, it’s all mine. I wanted to show them the land contract where it says that as soon as she defaults, she becomes a tenant. As luck, she became a tenant. They said, “Had you brought that to us when it first happened?” I made that point and switched it to a landlord situation that it would’ve stopped accruing in my name. This was years before I even bought the land contract. You don’t get to do that. Do you think that would work?
I highly doubt it.
We’re predatory lenders supposedly, but we’re getting stuck with these massive water bills, tax, bills and stuff. How are we the bad guys?
You’re not. I’ve had some water department service tell me that, “You guys caused the problem.” How is that possible? That doesn’t make any sense. These are the times. They don’t want to burden the borrower and tenants. That’s what it is now. A few years ago, even as an attorney, I was going to hearings for foreclosures. We were the bad guys too. Every time we’d go to court, they would pick apart everything in our file to make sure every single thing was done correctly. We’re talking grammatical errors. It’s a tough landscape. We’re weeding through it.
We jumped on something that Gail mentioned about land contracts that says, “If you don’t pay, you turn into a tenant.” In any of the states you practice in, is that viable?
You write the contract and then there’s the law.
You have to do the release. If they stay there, they’re considering month–to–month of you accepting payments. Now it’s not going to work.
What I’ve had an attorney do in another state was tell the borrower that, “Based on the agreement, you become a tenant. Sign this,” versus going through the forfeiture process. They’re like, “We understand because that’s what the contract said.” They signed it. We ended up working the Cash for Keys deal and stuff. I was thinking, “Maybe I should have all my attorneys say, ‘This is what the contract says.’” Start with that saying, “Do you want to sign a cancellation?” What happened on this instance was his contract says, “If you stop, you’d become a tenant. Your rent is going to be $300 a month.” The going rent is probably $900 so they think, “I’ll be a tenant forever for $300,” not realizing that.
It’s a good play to say that to the borrower about the payments, “If you’re looking to lease this, it’s going to be $900. Your payment is $400. You’re going to have to work with me because you’re going to have to be forfeited or foreclosed and then what’s going to happen?” Maybe you can use that as a negotiation tactic, but not the fact that it’s going to convert.
This is what happened to me with a contract. We all know the standard contract has all these clauses that we’ve been talking about. I happened to be in a state where the cancellation process involved that the borrower had to miss two payment. You would send a 45-day notice. They had 45 days to reinstate. If they didn’t, there was no hearing required. The land contract was automatically canceled as a matter of law. You let them know it’s happened. There’s a five-day eviction period by law. I had the standard. People become a tenant after they’ve missed a payment. I was like, “Aren’t they a tenant?” “No, you have to do the 45-day thing because that’s mandated.” The five-day eviction period is also mandated. We get to that part and they go, “Your contract says 30 days.” You’re going to have to give them 30 days. I was like, “I thought we weren’t going by the contract.” They’re like, “Now we’re going by the contract.”
You’re going in and out of that contract.
It seems like whatever gives more latitude to the borrower is what we’re going to do, whether that’s in your contract or in the law.
If the contract differs from the law, the law is going to win. The flip side in Michigan is it’s a fifteen-day period for default. If your contract says 30, you have to stick with 30. They’re going to look at what that interplay is going to look like. Every state that I’ve worked with has that at least 30-day period. Michigan’s got fifteen. You’ve got to go to the forfeiture process and get that contract forfeited. At that point, you can tell that borrower, “If you want to be a month-to-month, start paying.”
Does your office do legal work for tax certificates in Indiana, Michigan and Ohio?
We don’t. In Indiana and Michigan, I’d be pretty scared of doing it. There’s so much involved in getting those sales done.
There’s a lot of property in a commissioner sale in Indiana. I cannot believe the initial euphoria like, “I got such a good deal on that thing.” I feel like a vampire is draining all the blood out of me. It’s the cost and the emotional aspect. First is the notification process. They have 120 days for a commissioner sale to redeem the property. When you apply, if no one redeems, you petition the court for the tax deed. You have to re-notify all the same people. It’s for 30 days. Then they want you to do a quiet title and re-notify all the same people.
That’s my point too. No underwriter will touch it. Don’t look at the case. They’ll see a tax sale, “There’s a lien here.” They don’t care what lien it is. “Sorry, you’ve got to clean this up.” If you file a quiet title action, you’ll probably be successful. The ones that you’ve got to worry about are those first lien holders that have a mortgage on the property. They don’t always get quiet in.The state is trying to make sure that everybody can live in a home and not have to worry about predatory lending. Click To Tweet
What happens in a quiet title process if someone comes forward and challenges or exerts a claim?
The party that challenges has the burden of proving the reason that their interest shouldn’t be quiet. If you have a first lien holder, they’re the ones that are going to fight usually. When they fight, the biggest argument is about a notice, “We never received a notice.” The burden shifts. Now the person who owns the property has to show they went through all of those regulations and processes. If they’re missing one notice, they’re gone. It’s subject to that lien.
Jumping back a little bit on CFDs. It’s looking like they’re going to continue to be problematic. One of the things people may look for is converting them to land contracts, which is something you do. I had you do one for me. We have a question, “If you convert a land contract to a traditional note, will the usury rates apply? Do you have to qualify that borrower through a registered mortgage loan officer with the ability to repay and all that stuff?”
That rule in our state is three lungs. That follows Dodd-Frank. You’ve got your three–lung rule. If you’re going to do those three times in that calendar year, we still prep those documents, but you have to get that mortgage loan originator to go and do the other documents or loan applications, the 4506, all of that. Watch out for that. You can convert them, but now it’s considered an origination.
When you convert it, you’re canceling land contracts. The new note could include those costs or you could bump up the UPB to include any costs for the conversion itself. If legal is X amount of dollars and originator was Y amount, could you add that too legally or not?
What you’re looking at is marketability. You’re releasing that land contract annulled to get yourself in a traditional note and mortgage. We’ve done this because it’s required. You need a purchase agreement and the deed. That borrower is buying that property. If that property is a market value of $50,000 and the purchase agreement is for $150,000, you’re going to have problems down the road. That’s the issue you’re going to have. If the property’s valued at $50,000 and all of your charges maybe equal to $52,000, $53,000, you’re probably in good shape. That’s how you can build those costs in. That’s how you can add them. You don’t technically add them. You do it based on the market.
Most of the ones I’ve done might have been $20,000. The property’s actual worth is $30,000. I always roll it in. One of the other questions that I hear varying back and forth too in some of these contracts is, “Can you include the servicing costs to the borrower and have them responsible for it?”
Your mortgage is going to show that if the servicing costs are allowed to put on there. I believe those aren’t allowed if they’re not in the mortgage.
If you’re originating a new one and it’s written in the mortgage, could you have them be responsible?
You can. It has to be disclosed, so make sure that’s happening.
Someone says it sounds like CFDs can be quite problematic.
Our chat roll is a massive of twisted fury and indignation.
I try and stay out of Ohio now. For people looking and they see a tape of CFDs in Ohio, should they almost treat them all as notes? How should somebody look at that if they still want to buy CFDs? Should they just stay away? What would your recommendation be?
You’re looking at if this bill is going to be retroactive. If it’s not, treat it like it’s a CFD until that ruling comes out. If it’s not retroactive, you know when that day starts. If you got to tape before that date, you should be okay. If it is retroactive or if there are some issues regarding some of the provisions are retroactive, you’re not going to look at it as a note. You’re looking at that as a lease. Even with the note and mortgage, you as a lender is not responsible for all of these taxes and insurance of the borrowers. They own the property. You’re looking at it as an actual lease. Are you willing to be that land? Even with a CFD, you’re a landlord. You’re still taking payments. As a lease landlord, you’re a lot more maintenance involved.
Wasn’t there also something in Ohio about strictly on notes, regarding whether or not you need a license? You invest in seconds. You have to do a proper notification. There are opinions back and forth on that. It’s very gray.
There were a lot of bills that were passed with the governor that was leaving the office. It’s pretty rare to do that, to sign that many bills as the governor passed at the end of his term. The first specific one was about second liens. If you want a second lien, you must send what they consider a pre-collection letter that tells that borrower, “Here’s how much is owed. You have the right to an attorney. You can file bankruptcy if you’d like. You can file seven or thirteen.” It’s an extra–added letter that’s unnecessary. The first thing is the second lien letter. You have to make sure of that.
The other provision is the licensure requirement through the Department of Financial Institutions. That one gets a little gray. We don’t know what the state tried to do. The state was supposed to give us guidance. It stated that they were going to give the public guidance regarding the licensure requirement. It added servicers as an entity that needed to get a license in Ohio. The problem is you become servicers when you get the note because you’re looking at taxes and escrow payments. If you do anything a servicer does, when you hold that note mortgage, you have to get a license. A lot of times, you don’t give the file right away to the servicer. You work the file a little bit yourselves. The minute you do that, you’re going to have to get it. Right now, the NMLS is in charge. Are you familiar with that website?
Yes. We’re not trying to get a license on there.
It’s under the mortgage section. It’s 1322.07. You click on there and it looks like it’s for servicers. As you dig a little deeper, it’s gray. I’ve still recommended, as a note owner and purchaser of notes and mortgages, that you should probably get the license until this thing gets squared away. You don’t want to be down the road that test case where you’re in front of the court. You’re in an appeal court decision. Now you’re in a Supreme Court decision. Your name is on it. You don’t want any part of that. That’s why I’ve advised that. That advice could be wrong in the future with guidance, but I can’t be saying that now without that guidance.
What’s the cost to get a license? Do you have any idea?
I have not seen that. I know there are a couple of investors that have started that process, but I have not seen what that final bill would end up being.
You mentioned Kentucky.
I forgot to say that you operate in Kentucky. Kentucky is dead to me. It’s not even on the map. There’s a big empty space.
In my understanding with that contract for deed, you’re fine with one in Kentucky if you’re going to buy notes. You almost need to be a lending institution with a credit line of up to $1 million. Is that correct?
Yeah. You could have a big hedge fund that gets to that million dollars, but you also have a bond. You have a lot of other requirements, a lot of yearly requirements. It’s not worth it. There’s too much money involved in doing it. That’s what Kentucky tried to do. That’s what they’ve successfully done. They only want institutional lenders there. That’s where we get our work. We get most of our work in Kentucky from institutional lenders and we still don’t get that many. It’s a tough state to get into when you’re looking at notes and mortgages. On the CFD side in Kentucky, you have to foreclose those. There is no forfeiture. It’s closure and that’s it.
How expensive is it?
It’s similar to our other states. I’d budget between $5,000 and $7,000.
Do we know when that ruling about the retroactivity?
The bill is going through its normal process through the state legislature. I’m monitoring it to see what gets changed and what gets put in. There was no discussion about retroactivity. Some of the provisions may lead you to believe that it’s going to apply to a lien contract before a certain date. Until that bill passes, it’s status quo.
You’ve opened up in Illinois too. I have avoided Illinois always as a note person because I was told there were very Draconian laws about note and being a note owner or debt owner there. How difficult is the licensing process there? First of all, do we have to have a license to own debt in Illinois?
That’s a big problem in Illinois. We haven’t found many issues in Illinois. People want to talk about Cook County. In Cook County, you’re going to get issues with high water bills that come out of nowhere. We have that issue here in Cleveland too in a county in Ohio. You get these massive water bills. I had one client that came to me that had a $25,000 water bill. The previous person in the property paid the last bill the year previous. I called the city and said, “How do you get $25,000 in a year? Was there a leak?” “We confirmed there was a leak.” It took about another year. They dropped all charges. He was like, “It didn’t make any sense.” That’s what I see in Illinois, Cook County specifically. It’s that water bill issue, transferring properties and getting all those documents together. In foreclosing, we haven’t seen many issues. We haven’t seen that timeline go to two years. When a borrower files for mediation or asks for mediation, that is going to extend the life of the foreclosure. It’s going to do that everywhere. The licensure requirement is required. It’s a little over $5,000 to get that license. I’m not familiar with whether it’s annually or a one-time fee. That NMLS website has the exact provision in there of where you need to go. It’s similar to Kentucky on the requirements and on the price tag.
Is there a bond that’s also involved?Land contracts were intended to be short-term; you’re looking at five years. Click To Tweet
It’s with a bond as well.
It’s interesting because there’s so much misinformation about this. I asked an attorney before you were in Illinois. They told me they wanted a $5,000 retainer to get me the license. That didn’t even involve paying anything to the state itself. I heard a very prominent guru on a webinar say it’s $150 and you just pay it. There’s confusion between a foreign entity registration and a license.
That’s what I thought it was. When you say that price, that’s about the price for licensure. I recommend that for anybody in any state that’s not their state. Get that one license. It’s very cheap. Illinois has a specific licensure requirement.
In Cuyahoga County, if you’re not a foreign entity, don’t they whack you or find you or something like that too?
They do. A lot of the sheriffs bid forms. They now require you to put the registration number of your Ohio LLC. That’s starting to be the requirement now. We saw that in some counties. I talked to Dave Clipper, a senior foreclosure attorney, and he said, “I think this is the standard share form. I can’t believe they’re putting this on here.” If you don’t have that foreign license in Ohio, get one. It’s not that cheap. We do that for people in Ohio. It’s a very seamless and cheap process. In other states like Michigan and Indiana, you need to get a brick and mortar company to do that for you.
I’ve used registered agents that will let you because you need one in most of these states when you register as a foreign agent and stuff like that. They have the brick and mortar in there and stuff. We talked a lot about licensing. In Illinois, we talked about registering out of state and foreign entities. Is there any type of debt collection license or any other type of licenses in Michigan or Indiana that investors should have or should start looking into?
That’s my next project. I’m putting that together for you all. Certain states require them, certain don’t. Illinois does have a debt collector license. It’s whether you would be considered debt collectors in that state. That’s why I need to fine tune. Every state has one. I need to fine tune that research and get that out to you. Right now, I’m not familiar with that. I just know that each state does have one.
We were going to do a show about how we’d like to strangle attorneys. One of the biggest things with attorneys is, from an investor standpoint, being able to get an attorney to respond or get an email. It’s the expectation factor. It would be good for you to share the expectation. In a world of everyone having one of these things, people can respond quickly. You might be court one day or whatnot. Just the overall forfeiture or foreclosure process, when you read what they have on Fannie Mae for the guidelines and stuff, that’s the most shrunk down version. A lot of times, they don’t include serving the person and all this stuff. Talk a little bit about that process as well as the day-to-day expectations people should expect?
On the day–to–day expectation, I like to digest my emails overnight. If you get a response that day, it’s probably a simple answer. In other times, it’s going to be in the next day. I don’t want to let it last that long, within a couple of days. Our expectation is within 24 to 48 hours, a client is going to get a response.
That’s unusual. If I get a response within a week from attorney, I’m satisfied.
Hopefully, you’re not getting that from us. The point of our firm to make sure the client is taken care of. If it’s multiple questions on multiple days, it might extend a little bit further. Chris, you’ve seen it. We’ve been pretty responsive at getting you answers you need and getting on the phone conference calls. It’s still a line of business for us. We are good attorneys. On the other side, we’re still running a business. We have clients that need that guidance. We try to make that turnaround 24 to 48 hours. If it does extend a little further, it’s probably an issue that we would need a little more on there.
I’m surprised how often I have heard from you on a Sunday.
It’s every once in a while if the kids are playing in the backyard. I don’t mind it, especially with something that I can answer pretty quickly. I’ll pop off an email. On the other side of it, the disclosure of those costs is very difficult. Those Fannie Mae fees are just attorney’s fees. When you’re looking at costs for courts, they’re all over the place. In Ohio, you don’t know where you’re going to be. In Sandusky County, it’s $1,000 to file a foreclosure in court costs. It’s hard to tell what county is going to do what. That’s why we’ve always told people to budget between $5,000 and $7,000 on your attorney’s fees and costs. That $2,000 gap is where you’re going to get hit with costs.
Michigan is the cheapest of all the states. It’s a nonjudicial. The costs are more in front of you and you know what’s going on. When you’re looking at Illinois, Indiana, Kentucky and Ohio, that’s why those costs range between $5,000 and $7,000. That at least gives everybody a good window of, “Top end. I’m putting $7,000 into this case.” In some states, they’re recoverable. In some states, they’re not. You’ll have to find interplay on that too. What does recoverable mean? Are you going to go after the borrower for those fees and costs? It’s not usually. If you want that property back yourself, you’re going to want to put as many of those costs on that bid to make sure you can put the full bids to get the property back. That’s how it works.
I’ve worked with you for a few years and other people on here as well. You handle the foreclosure debt. Tony handles the bankruptcy side. I see Katie and Molly a lot as well. I think Katie does the demand letters or forfeitures and Molly is on the foreclosure side. Is that how it is?
That’s correct. Katie is taking care of all the forfeiture work. Molly is taking care of the foreclosure work. We have a separate side for our Illinois foreclosure that’s separate from other states. The idea was we tried to build our collections department with the Illinois side as well. That’s how our firm is built on where collections are located and where bankruptcy is located. Collections are in my office. That’s why we felt a little better to keep the Illinois side of it, at least in my office. With Illinois, everything is eFiling. We’re not worried about having staff having to repair within the state of Illinois to send paperwork from Illinois with the wedding signature. It just has to be reviewed by that attorney. The attorney doesn’t have to have put an additional signature on it if they reviewed it. Everything’s done through electronic means. That’s how we play the firm. Katie does the forfeitures. She did a pretty job. We’re picking up a little bit, so she’s a little bit overwhelmed. We’ve got help on the way. We’ve got the good processes in place and the foundation there. We’re trying to keep that as good quality as possible.
Ohio is the only state that you represent where if you go out and do forfeiture, you go to court. You have to have a personal representative for the company. You have an attorney there, but my entity has to have somebody there. Either I have to fly out to Ohio or find a guy on the street corner to pay him $100 to go to court.
It’s a street corner in Ohio. Ohio is tough in that way. You do need a representative. I’ve tried in the past putting affidavits together and filing them with courts. We were getting courts continuing hearings because they wanted a person or just dismissing it. “There’s no person here. We don’t look at affidavits. We want people.” We’ve made that blanket. You’ve got to have a rep there. If you’ve got a property manager or somebody that’s around the property that can show up at these hearings, they have to say whether the borrower will default. Ohio, out of all of our states, is the only one that does have that requirement.
It’s amazing that $100 will get you on Craigslist.
Ohio is like that kid in school who’s trying to be annoying.
It’s tough. You have to watch out too because judges are going to ask questions for these property managers whether they truly are property managers. They may say, “No, I’m just here for the hearing.” You’ve got to be careful with that because they will be called in at that point.
It’s like a green card marriage. They will know if you’re really married, “Are you the property manager or are you a guy from Craigslist?”
That’s what happens with evictions here on standard leases. It’s property manager driven. A property manager knows that property best. They deal with that tenant the most. They’re the ones that are going to have the most knowledge behind that case. We see that a lot on that end. We’re seeing too now in post-foreclosure evictions. We normally didn’t have anybody appear from the bank because they bought the property back and the borrower lives there. There’s no rent so it’s considered non-color of title. All we’re trying to do is remove the borrower or remove the borrower from the premises. Now judges are requiring a representative to appear. We asked one judge, “What do you want us to ask the bank? They took the property back. Here’s the sheriff deed.” They just want them to come to court and say that. It’s getting strange. In Ohio, they do want to see representatives there to testify.
We talked about a lot of different states and so forth and so on. From the moment of default of the borrower, through the entire cycle, whether it’s a CFD or note in the states we’ve talked about, you handle the whole gamut.
Even on the collection side, people have second liens. You don’t always have to foreclose. You can file a lawsuit for breach of contract. We can garnish their wages. We do that as well. Anything real estate related, we do it. We do it at our firm. We do it pretty good. With the quality of the way that it is now, we have good people in the right places.
On the flip side too, origination or more like land closing side where if you need to write a CFD, write a loan modification or write a new mortgage and note, you handle all that aspect as well.
All doc preparation, no matter what it is in the real estate side, we can handle that. It’s also converting the land contract and note in the mortgage, even down to closings and the actual closing. We have a title company that we work with that handles all the title side. We handle the doc preparation side. It’s that one-stop shop where if you’re looking to close, we can handle that as well.
Thank you, Franco.
Do you have a closing statement?
Our firm is a little unique in the fact that if you want a foreclosure done, you usually go to the foreclosure mill and to those big foreclosure firms. It’s the same with collections and bankruptcy. We’re a little unique in that we are smaller in size, but we can take real estate all the way from default to bankruptcy to foreclosure sale, all the way to collections. We’re a little unique. We hope to grow that side of that and market that a little more. With that unique process, people do enjoy that.
People do not use a foreclosure mill. They just run it right through the gamut. I’ve had three notes that were run through that process and there were so many issues with them that my attorney had to clean everything upon. It’s just FYI.
You handle commercial as well.Once you start buying properties, some of the utility bills follow the property. Click To Tweet
We can probably talk more on the commercial side regarding cognovit notes and how that’s changing the landscape. We can probably save that for another time. Anything on the commercial side, we do handle that as well.
How do people get in touch with you?
We’ve got a Strongsville, Ohio office and a Loveland, Ohio office. You can contact me at (440) 209-6495. My email is Franco.Barile@SottileAndBarile.com. Our website is SottileAndBarile.com. You can reach out there. If you want to reach me, my phone’s good too.
Thank you so much, Franco. It’s been great.
Thank you, Franco.
Thank you. I appreciate you.
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About Franco Barile
Franco was licensed as an attorney in 2006 after graduating from Thomas M. Cooley Law School with a Juris Doctorate and from John Carroll University with a Bachelor of Arts in Political Science. Upon graduating and passing the Ohio Bar, Franco began working for a large firm in the Northeast Ohio area. Franco honed his skills as an attorney handling a variety of real estate foreclosure issues, collection matters, title issues and transactional work during the years since he was first licensed and eventually opened Sottile & Barile, Attorneys at Law in 2015.
Franco maintains state bar licenses in Ohio and Michigan and federal licenses in the Northern District of Ohio and the Eastern and Western Districts of Michigan. Franco is a member of both the Ohio and Michigan State Bar Associations.
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