- January 28, 2019
- Posted by: august19
- Category: Podcast
Sometimes, a property is not as simple as it looks. We may have come to a point in our note investing career where we stumble upon a very complex purchase. At this point, we wonder when we can call a lawyer. This decision can be hard for some, that is why Chris and Gail discuss a particular experience that lays out a scenario for when to call a lawyer on a property. They take us into a property in Flint, Michigan that begs to cover a number of legal aspects – from identifying an heir to unraveling a probate and more. Giving us more possibilities, Gail and Chris share a couple more examples on when you may have to bring in a lawyer and even have a home vacated.
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When To Call A Lawyer On A Property
Gail, how are you?
I’m doing well, Chris.
On this episode, we’ve got some interesting topics to discuss, a situation that we’ll be discussing. Before that, why don’t we talk about what happened? I’ll let you go first because you’ve got some interesting things going on.
The one that I’m excited to say is that I bought a church. I have an option to form a congregation and be the leader of a flock. What I’m hoping to do is create multifamily. This is not a classic urban church, Gothic church with stained glass windows and stuff. It’s nearly 4,000 square foot single-story building, L-shaped, in a residential neighborhood. We have to get a zoning variance from institutional to residential but given that it’s surrounded by houses I’m hoping that’s not going to be a problem. The plan is to make four pretty spacious apartments out of the 4,000 square feet. This is my first development project basically.
That’s going to be interesting and we’ll definitely want to hear more about that on future episodes. For me, I’ve got a property that finished its redemption up in the wonderful city of Flint, Michigan. We’re foreclosed on a borrower who has about eight rental properties and was using them all as rentals. This one wasn’t paying the mortgage on it. We reached out, tried to work out a modification for her to have the property be positive cashflow. She rejected that and basically said, “Take the house,” and we took it through foreclosure. We got it back and I had somebody stop by to check on it. At that time, somebody was in the house. When somebody went by this past week, the house was empty.
What was even better than the house being empty was it wasn’t trashed. The house was in good condition. The borrower mentioned that she painted it months ago. It was kept in great condition. Looking at option strategies on that whether I owner finance it under contract for deed or a new note or use it as a rental. Based on my portfolio, typically I’ll probably look to get rid of the property. If anyone out there is investing in Flint looking at a decent low-cost property that probably has a rent of two-and-a-half to one of the monthly rent versus the payment amount, it will be something to definitely consider. If anyone’s interested, reach out to me.
I like Flint and I cannot believe that you have taken back the property and it’s in beautiful condition. When does that ever happen?
The properties I’ve taken back in the past, including this one, we recently took back with the garage. That house wasn’t in bad shape. People typically don’t leave things in the greatest of conditions. I haven’t checked all the lines to see if somebody poured concrete down one of the lines which people have been known to do in the past. Hopefully, everything checks out and it can turn around and liquidate that asset.
That’s a great rental market. I don’t think you will have any trouble at all selling that list.
The acquisition costs if it’s a $20,000 property that can rent for $500 a month and I owner financed it to somebody at $250, $300 a month, it’s nice positive cashflow. People got limited money put down. I put a few thousand down. You don’t have to deal with the bank, which is the best thing. You don’t have to go apply for a loan and trying to get a loan for property under $50,000. Everyone who invests in real estate knows how difficult that is. I tell a lot of people this. Reach out to note investors because they can be your best friend if you buy and hold. We’re going to roll into our main topic, which is we are going to discuss a complex asset that we have in Missouri. This was one that was bought as part of a small portfolio pool and it was included in it. This one has if it was a body would have hair on its palms and bottom of the feet because this one truly is one of probably the most complex purchases I’ve ever seen. Gail, do you want to give people some intro to this asset?
What we want to talk about is this is an asset. Our topic is when to call a lawyer. When do you know it’s time to call a lawyer? I had seen this asset on tapes for over a year and I know you did too. People kept passing it over. The first time I saw it, it’s in Missouri and I have reservations about buying things in Missouri. I know an attorney told you not to buy any CFDs in Missouri. We should probably find out why that is. Why don’t you tell us the reason before we move on?
It was more similar to Georgia where there can be some battles over equity in the property and if you take it back, do they have any equity stake in the property? The foreclosure process is short in Missouri. It’s not a painful process compared to other states. The attorney was more or less like, “Why would you do a contract for deed in Missouri and not do a note?” because sometimes it’s been contested. If they’ve been paying for a period of time like in Ohio, it turns to a note. The eviction process and that whole process can be a little more complex if you get a lot of pushback on it. That’s why what I was advised was the laws aren’t clear cut. Sometimes you’re at the mercy of a judge, whereas with a foreclosure, the laws are the laws. That’s from my recollection of the conversation.
It’s not like they offer these to us like, “Here’s a property. Do you want it to be a CFD or do you want it to be a note?” You find these things, they are what they are and then you decide. In this particular case, you and I were chin-deep in a whole bunch of things. We had an opportunity to buy this relatively inexpensively and we jumped on it. Because we are in the habit of looking at servicing notes before we buy and pay histories, we did ask for those but I’m thinking neither you nor I looked at it closely. One of the things were either you were doing it or you thought I was doing it, but in any case.People typically don't leave things in the greatest of conditions. Click To Tweet
I had looked at it and I remember they mentioned the borrower was deceased. At the time, this is also part of managing a business where sometimes you got to stay focused on things and bear down. One of the assets I believe was a note and one was a CFD as part of some of these assets we bought. I was intermixing them thinking, “It’s a note where the borrower was deceased. It’s not the end of the world. I’ll simply go through probate and stuff,” but it’s a land contract or contract for deed where the borrower is deceased, which can create possibly some more agita on our part for trying to bring it to resolution.
The first inkling that this was not going to be a normal process is when Damian at Madison sent an email saying, “Do you know that the borrower is deceased?” He sent a link to a news story because unfortunately this young woman who was probably no older than probably mid-30s was murdered on the property. It was a murder-suicide situation where her boyfriend or husband is the one who killed her. She left four children. They were at the time ages two to fourteen. That was a big shock in itself. It was sad. We were looking at news clips, there was a photograph. She looked like anyone’s daughter, anyone’s sister and first it’s a horrible feeling to think about that happening.
The people involved looked like everyday individuals. Unfortunately, there were some problems in the past when you watch the news articles. It’s a horrific thing to happen to anybody from that standpoint.
They interviewed several grieving neighbors. Apparently, she was a pillar of her neighborhood and her church. We’re looking at the notes about what’s been going on since. It seems for this entire year the previous owner had been trying to get the death certificate and certain things that they needed. The family reading between the lines in the servicing notes which are paying attention to, it seems a year. Hence, they haven’t even started any legal procedure. The borrower died without a will. She’s got four young children. It’s totally unclear what the situation is. One of our first questions was, “Do they in Missouri have equity? Does the family have equity?” It’s a fairly low balance, it’s only $21,000. If the house is worth considerably more than that, who does the extra value belong to? Would the state want her heirs to have that? You and I talked about it and made an instant decision that whoever’s entitled to it, we want them ideally to sell this house and keep the money over and above what they have to pay us for those kids. We’re not looking to take this house back and cash-in in a big way.
This is one where I’d say the true definition of doing a good deed is basically trying to work this asset to a win-win resolution. Being also cognizant of the things was making sure that if it goes through probate or something along those lines and they have to sell the property, it’s making sure it’s worked in a fashion that can be the most beneficial also to the family and trying to work with them. After going through a horrible loss and having four children and one of them coming closer to college age, anyway we can help them we’re definitely going to try and look for ways to assist.
Those kids have lost both parents in probably the most traumatic way that we can imagine. The legal questions immediately pile up. The borrower died without a will. Who are the heirs? If we were looking to talk to somebody, I don’t think we even know who we’re talking to and what conversation we’re having. My first question to you was does the land contract stipulate anything about what happens in the event of a death? There is language about heirs and I said, “We don’t know who is considered the heirs under Missouri law.” We quickly realized we’re out of our depths and the only person who can unravel this given that they have to access court files and things is an attorney. We’re not do-it-yourselfers on this one. This is a real situation where you call an attorney.
It is because first off we had a show about talking to your borrower and who can you talk to. Be careful who you talk to. In this instance, the question is who can you talk to because who is the heir? Who can you have the conversation with regarding the property? The property is still occupied. We’re not sure if the family is, the grandmother or somebody is living there with kids. The incident occurred on the property. Thankfully, it wasn’t in the residence because the kids were inside at the time. That’s the first question and then first trying to unravel is there probate? What’s the probate process? Is that something our attorney can even assist them with? How can we assist in this way?
The prior servicer was running it like a business and they were looking at it from, “Borrower passed away. Send me a death certificate,” and they would constantly hound them for the death certificate. They were looking for it to confirm that the person wasn’t lying to them. Whereas based on the information we’ve been provided, it’s pretty clear unfortunately that the woman has passed. From that it’s going to be interesting progress as we go through this and an understanding because with it being a land contract, it’s different than a note.
I have another deal, not this one, where I have a land contract. That person owes more than the property’s worth and it popped in my head, “Can I do a deficiency on a land contract?” because it’s still a contract. On a foreclosure, there’s a set sales price on it. In a forfeiture, there isn’t a set sales price. How would you determine what the deficiency is? With the land contracts, this is a new path or new road we’ve experienced. We wanted to share that with people in regards to where we’re at with this thing and having the attorney take a look at it and unwind and untwist this.
We should talk about other situations where an attorney has been essential. I should mention too that we connected with a gentleman who has been in the note business probably longer than anyone I’ve ever met since the ‘90s. To me, it seemed the history of the note business is that it happened to start with the crash in 2007, 2008. Most of the people that we know who are major players in it seemed to have kicked into high gear with it. If you think about it, you realize people were defaulting on mortgages before that. It’s been around longer than that. As a real estate modality that has a lot of people in it, working it, the crash was the beginning of it. This gentleman is an attorney based in Louisiana. He’s worked for a lot of the big funds on handling their foreclosures and stuff and developed a big network of attorneys in different places that he uses and recommends. He has given us that list. Anyone who’s looking for an attorney. None of these attorneys are the usual suspects that we all talk about. I don’t know anything about them. I don’t know anyone who’s used them. I’m interested in starting to use some of them and giving them little road tests.
There are definitely some states where I would rate my attorneys as a B player where if I can find an A player. It depends. On this asset we’re talking about, I’d rather have an A player at an A price try and work this. I’ve used C players before who have driven me nuts. I’ve known somebody through Facebook reached out to me because they’re using an attorney in Maryland who had completely screwed up a foreclosure. Delays cost them thousands of dollars. They knew I invested a lot in Maryland. They asked me for my attorney referral and I sent them Brian’s information. Brian took care of it and cleaned it up for them and got them on the right path. It’s a certain instance. I don’t mind paying for the expertise by any means. I always don’t mind paying for it but sometimes paying a premium.Reach out to note investors because they can be your best friend if you buy and hold. Click To Tweet
You brought up a good point. What other times should you have attorneys involved? I always have an attorney typically review the collateral file when you’re buying your loans, which we’ve got an attorney reviewing this one. I’ve got a case where the borrower is claiming that a land contract was falsified where the property is consisting of multiple lots. The person bought the property or signed the land contract several years ago when he was paying principal interest and taxes and insurance. I’ll use rough numbers. It was $400 a month. Taxes and insurance have gone up over the last several years. It’s $475 a month.
He kept shortchanging that number and stories have changed. Why? The moment anyone claims that they’re going to sue you or get their attorney involved, that is in my mind considered an aggressive action. When someone does that, that’s when I get my attorney involved. Whether or not they were bluffing or not, I always reach back out to them and said, “You said you were getting your attorney involved. The moment you do that, I got to line up my counsel and make sure I’ve got somebody to defend this.” If there are land issue conflicts or contract conflicts, I typically will get an attorney involved. If there’s ever a question or doubt on things, go the conservative route and get the attorney involved. Sometimes it might be he’s involved once and doesn’t have to stay involved. Sometimes he or she may need to see it more through fruition. I take the more conservative route and I’ll get them involved earlier than waiting for something to drag on, which might be a little late to bring them onboard.
Whatever it is, getting an attorney involved in situations where people are not communicating with you and things like that. You’re trying to reach a borrower. They’re not answering the phone. They’re not returning messages. It’s amazing the effect that a letter on an attorney letterhead can have on somebody in terms of focusing their attention and bringing them to the table.
What are some other situations that you can think of off top of your head where somebody should probably get an attorney involved?
I’ve been remiss in this area and I haven’t gotten an attorney involved beyond the collateral review and then where they are necessary for the forfeitures. When it comes to the forfeitures, it’s been a mixed bag because they send the initial demand letter. Usually, the borrower gets in touch and either signs a cancellation or there’s some other wrap up to the whole thing. Most attorneys on a forfeiture want their entire fee upfront. It feels like it’s because they know it’s not necessarily going to go all the way through the courtroom stage, but it’s going to get wrapped up pretty quickly. They would like to have the money in hand before you don’t need them anymore. Is that your impression of how it works?
It is. It’s like putting a retainer almost in some sense. One of the benefits off the top of my head mention is most of the attorneys that I do use, a lot of them either have no retainer or minimal retainers. I’ve had one time a call with somebody who wanted a $5,000 retainer to do a collateral review and I’m like, “How about $2,500? This isn’t The Price Is Right. How about $250?” One thing I’ll mention for investors out there is a place you definitely want to have is an attorney is starting out. When you get started and start creating your LLC, you start creating JV agreements and other types of documents, those need to be reviewed by an attorney.
The reason I say that is if you ever get somebody questioning the type of deals you do or JV, a perfect example is if somebody JVs with me. They take my JV agreement and go start using it when they start doing their own deals. There’s nothing I can do and personally, I don’t care because it’s my document my attorney created, but that was custom created for me. Clearly, I know things in my JV agreement. If other people put it in their agreement, I feel bad for them because of certain aspects of how it caters to my business and how I want things to happen. The other flip side of it is if it’s ever challenged, I’ve got an attorney who I can pick up the phone and call and say, “Somebody’s questioning this. I need you to defend it,” and the answer is going to be, “Absolutely.” Whereas say if you took my JV agreement, all of a sudden who are you going to call and say, “I need this thing defended.” If you call me up and ask me for my attorney, I could give it to you but he’ll probably not defend you in that instance.
The other thing to do is to take yours and show it to an attorney and say, “What would you do with this?”
That’s what I’ve done in the past is I’ve seen things in documents that I liked and I’ve cut and pasted them and sent them to my attorney and said, “I have this but I want to custom create it. Here are some of the highlights of how I want it created to be in the deal for X, Y and Z.” That’s what I recommend. You don’t need to start from scratch, but you definitely want to have something that is custom created for your own benefit. I would bet that 99% of note investors out there who are buying product have never had this done. That is have you ever had your attorney review a loan sale agreement?
No, I haven’t. Have you ever had a loan seller alter an agreement for you? What were the material changes that you asked for?
Yes. When they put in a lot of them as-is clauses. I’m okay with certain as is clauses, but I always make sure there’s language in there that if I’m buying a first position note that it says, “I am buying a first position redeemable note.” If there was ever an issue down the line or something where it was found, even title report then pick it up but it showed later on that it wasn’t redeemable for some cause. I would get my funding back. I wouldn’t get any money I’ve spent on legal or anything like that, but I would get that back. What I have done in the past is anytime I buy from a new seller, I will typically send that agreement over to my attorney to have him review it. I read it first but I’ll send it over to him to see whatever highlights are in there.The true definition of doing a good deed is basically trying to work an asset to a win-win resolution. Click To Tweet
If I make any comments, then that is the boilerplate going forward. Basically, it’s pretty easy to know going forward if there were no changes, which I say 99% of the time you probably don’t need changes. There are some larger sellers like if you go buy off of dead acts or some of those, some of those are like, “We’re not guaranteeing anything. You’re buying this thing.” It’s like buying a house as is, sight unseen type of thing. Those are the ones you got to be a little more careful on. The typical sellers that we’ve bought from in the past, their agreements rarely have I had to modify them. It’s usually a word here or there. That is additional protection that I’ve had put in.
Adding the word, redeemable, means that they have to give you your money back?
There’s usually a section for warranties in the loan sale agreement. In that section, basically, they’re warranting that it’s a first position redeemable. There was a time period involved as well. That might be 120 days or whatever that time period is. I can’t go back a few years later and say something that’s got to be within a certain period of time. Where it can come in handy is if there is something that if there was a title issue that came up or something came up at foreclosure, at some point in time it can flush some of that stuff out. Typically, when you pull the O&E report that usually clears everything.
For example, if I had a note that ended up having to get a title insurance claim because when the note was originated, they recorded something out of order. Thankfully, the title insurance carried it and so forth. At that point in time, it technically was not a redeemable note because it had a cloud on the title. At that point in time, I could have technically gone back and sold it back to the owner or paid $150 have the title insurance company cleared up, which I paid that to have it resolved. You never know. It’s something that when you’re dealing with tens of thousands of dollars, I want to make sure, “I’m buying something that is redeemable.”
The question comes up, “If it’s outside the statute of limitations on something, that’s technically not redeemable.” There was a state, as an example, where you’re only allowed to file two foreclosures or two demand letters. I know there are states like that, most of them I don’t invest in. If you file a demand letter, file foreclosure, and vacate it and then constantly do that. There comes a point in time where your statute of limitations would run out. That would be a perfect example of a note that is still the first position, but it’s not redeemable because a prior owner of that note basically exhausted all their collection efforts. Has it ever happened to me? Close to 100 notes, it hasn’t. I’m guessing that there are notes out there that have probably happened to people in the past, especially if we asked Scott Carson. He’s bought how many thousands of notes or Eddie Speed or some of these people have bought tens of thousands of notes. I’m sure at some point in time something like this has happened. Even if it hasn’t, it makes me feel better sleep at night that I have that covered in my language contract.
The other question though is how easy is it to get a seller to honor something like that? We’ve had good luck when we have side agreements in contracts about the seller have to buy the note back if certain conditions aren’t met. This is a good Notes and Bolts tip. Let’s segue into that. When you’re buying something and the seller is making a promise to you like, “We have this giant lien on here, but we will take care of that for you.” It’s important to get that in writing in a side agreement, either that is made part of the contract ideally or that they sign a separate letter and being specific about the liens that you’re talking about.
I would put on there too a deadline for them to pay them because I’ve had situations where they’re intending to pay them and they keep intending to pay them and they’re still intending to pay them. Ultimately, I had one seller basically not reneged on a side letter, but they were supposed to buy it back. They didn’t buy it back. They took care of some liens but not others. They really did not want to take it back. They basically refunded all of my money except $1,500 on an asset that’s probably a contract for deed where the house is worth $40,000. I accepted that but the important thing is to have it in writing because they wouldn’t even have had to do that had I not had it in writing.It's amazing the effect an attorney letterhead can have on somebody in terms of focusing their attention and bringing them to the table. Click To Tweet
I have two things to add to that. One is the side letter needs to be done up front when you’re buying the note. It can’t be done like, “I closed on this deal. By the way, I need this and that.” Where you see this a lot is if there were some unrecorded assignments. Basically, someone recorded assignments and then it could be a few hundred bucks of record assignments depending on location. You buy the file and then you have to record them when you record this assignment and you’re thinking, “They should have done that and paid for it.” If it’s not in the agreement or not in a side letter agreement, don’t assume they’re going to do it. Assume that the file is coming over to you as it is.
The second thing is it’s about also trusting your seller. I know who you’re talking about in that instance which it’s a seller you’ve bought in probably two dozen assets from. You’ve got that relationship with them. If this was a guy on Exchange Loans or Paperstac that says, “I’ll pay those past taxes within 30, 60 days,” and it’s somebody I don’t have an existing relationship with. My comment would be, “I’ll close and wire the funds when you pay off those taxes and show me they’re paid.” Your relationship with the seller will play into it as well. It’s another good conversation and hopefully people find a lot of information out of this. A reminder, continue to read our blogs. You can go to GoodDeedsNoteInvesting.com/podcast. We also have a Facebook page, Good Deeds Note Investing. We also have the Notes and Bolts Facebook group, which caters more towards contract for deeds but also answer any questions you have on there as well. We look forward to the next episode. Gail, do you have any final closing thoughts?
Please join us for our open mic sessions where you can ask us any questions you have about your deals, about note investing in general.
Thank you, all. Go out and do some good deeds.
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