All Forum Posts by: Dion DePaoli

I have never used a JV for such matters nor would I. In a JV structure you are open to full liability. JV's are not legal entities and as such do not have tax liability or enter into contracts. Technically speaking your vested interest in to the property should be each member of the JV. (tenants in common) Because of such, the interests of your partners can be lien by creditors from other dealings which may not be a part of the venture. JV's are ruled by interpretations of partnership laws for each state however there is no great body of law around a JV like there is a LLC. As such in a JV all of the rules need be spelled out in the JV agreement/contract.

We have always used a LLC, put the property or properties into the LLC. The LLC is then owned by the members. The LLC is a legal entity and limits the liability to the members. All the rules are detailed out in the operating agreement. All of the concerns for member contributions, membership term and new members can be addressed and is typically addressed in the operating agreement. None of it is really a big deal and a good lawyer has certainly dealt with more than you have thought of as "what if".

First thing first, the subject property you speak of (5 unit residential) is not considered a conventional residential property. Conventional residential properties are 4 units or less. So the loans for which you can qualify are now a little more limited. A 5 unit complex will be treated more like a commercial loan. That may work to your benefit.

Any time you encumber more than one property and tie it to the same note you have "cross collateralized" the note. This would mean the lender files a security instrument (deed of trust/mortgage) against all properties given as collateral. Sometimes the equity found in all the other crossed properties beside the subject property is refereed to as "Boot Equity".

Offering the equity of additional property is typically not a supplement for putting cash into the deal. But that is not a rule written in stone. The additional collateral is thought more of a reason a borrower will ensure they debt service opposed to an offset of down payment. In some situations if the boot equity offered is from the primary residence the lender will not take it all.

Getting a HELOC, provided you and your property qualify is it's own loan. You will have to qualify for this loan all by itself. Assuming that works, the lender might restrict the use of HELOC funds for down payment of the commercial loan.

That being said, the bank might be very willing to bundle all that up and give you a loan. The SBA has some loan programs which you might want to see if your bank or a bank around you can write as well. Those programs include purchase and rehab monies. Because you have step outside of the realm of residential property the rules change. Sample a couple different small banks by you, they might have different programs. This will mean they way the underwrite the loans will be different. Don't confuse conventional residential loan criteria with the world you walk in now, it will be different.

The rider you signed says you will only use the home for personal/family use. You will not subject the home to any type of lease, rent, timeshare or alike. Technically speaking at any time if you put a renter in it, you are in violation of the covenants found in your rider. If the bank finds you in breach of the same, they can call the note due in full. Depending on how long you have owned the property they may attempt to pursue a charge of loan fraud against you as well.

You can contact your bank or loan servicer and explain you want to rent the property out and want relief of the second home covenants. You may want to both call and send a certified letter to them to CYA. Their lack of response is not justification for breach of the agreement, as that is not found in any of the documents you signed. So I would pursue the concept until you get an answer. This would be the least expensive way to amend the home's designation.

Your second line of attack would be to refinance the home with the proper designation. Be aware that the underwriting for investment properties is different than second homes and they will look for reserves for 6 months to be on hand. Either way (amend or refinance) ensure you get a document that says it is now an investment property so you cover yourself.

Banks and the IRS are two different set of rules. There are some rules around the IRS's view on the matter and one of the tax guys can answer your tax question around that topic.

I think you may be think of the initial set of information, regarding why a seller will not provided information. When a deal hits the market initially there is no real standard to data provided, unfortunately. I would always ask to see as much information as possible without having to get serious about the deal, however sometimes sellers and their agents want that serious engagement before releasing some data.

If a seller can not issue rent rolls, which is a standard document, then I would run as they are clearly playing games or simply are not the owner of the property.

Regarding property targets. I think there is good potential in B and C class stuff in most markets. Most of the A grade stuff goes into institutional guys and really is not much of an upside as they drive the price up. I personally have not seen too much D class stuff that I thought was really worth pursuit once everything was taken into consideration.

I agree with the above statement to use the current numbers when evaluating the deal. The property is only worth what it is worth today, why would you speculate into the future and give your upside to the seller? I see banks do this like clock work. They try to push a future value based on some stabilized occupancy and rental stream. I see the same in some of the appraisals folks get on these distressed projects too, where the appraiser used a proforma to come up with a value based on cash flow.

Be strong in your skin and know that the value is the current value today based on the current numbers today.

A little more of a description as to your action plan would help.

If you are trying to somehow secure capital you are putting into the deal you could mortgage the property where you are the lender and the borrower is the entity who owns the asset.

The tax guy is running around here, you might want to get some of his feedback. It sounds like you want to own the asset but not have risk of loss. I am not sure about the tax liability on such a setup.

Is the money to purchase the property all your money? If not, is there a lender involved? Did or is your partner contributing to the deal? Is this within the scope of your LLC operating agreement?

That does not make a whole lot of sense. The fee you are referring to is a delivery fee paid to Fannie/Freddie to sell the loan into them. The fee hike is does not take precedent until April 2012. I do not know how that would push your loan aside in any manner even if it was in place. BTW, it is a 10 basis point fee hike, not really that big of a deal. It just does not serve that purpose.

It is not a fee that a consumer is paying to "get" the loan. Typically there is a fee charged if you fail to deliver in accordance with your contract to Fannie/Freddie. In other words, as a lender you say you will sell $100 worth of loans to F/F and you only deliver $75 you may face penalty fees in accordance with your master contact. None of that really should affect your life as a consumer except the opposite where the lender tries to get enough loans to live up to the contract.

It might be time to find a new lender or give your current lender one last chance to finish and fund the loan. It sounds a bit like the run-around.

The closing attorney should be able to give you an idea of what the issues are.

If you have been hanging around this deal since October 2011, you have more patience than most. If it were me, I would say who cares by now to figure out what the issue is and, issue my demand letter to the seller and when they don't close I would walk and not look back. I am sure it is not the only deal you can find.

Jason,

It is unclear what state the loan you are talking about the loan is in and that does matter to a certain degree. Your first lien has priority over the other liens provided they are not government liens. So the first lien is first in line to be made whole by the sale of the property. If the property goes through sheriff sale and the proceeds from that sale are insufficient to pay the first lien bid then the property will revert back to the first lien holder. If the bid garners more money than the first position sale bid then the liens will be paid in priority accordingly.

When multiple liens are present and the property goes through sale, the liens will be cleared from title. The borrower will still owe the money which also means those liens will become unsecured. Those lien holders will only be able to pursue collection via the borrower if allowed in the state.

Question number 2 - loans do not have lis pendens, the property has lis pendens. So I am not sure exactly what you mean by this question. I assume that is what you mean, there is two other parties with lis pendens on the property beside you. Those could be the liens subordinate to you. Provided they are the same lien holders they are just publicly stating their interest in the property and that some legal action is to follow. If the foreclosure was being contested, that would be a response to a foreclosure suit and would not show as lis pendens.

Question number 3 - it is not clear what type of property the loan is attached to but even for commercial property $100k in foreclosure fees is way, way, way too high. Again it is not clear what state the deal is in which would matter a bit to give you feedback on your number. Secondly, foreclosure actions would increase in cost if the borrower files for bankruptcy as you would have to defend the BK or if the borrower attempts to fight the foreclosure complaint, provided this is possible in the state the loan is in. On average if you budget to spend 3,500 to $5,000 you should be in the ballpark. Bare in mind, that any advances made by the prior mortgage/deed of trust owner would contribute to the total cost which would diminish your expense on the matter.

If for some reason there is some serious title problems and the other liens fight claiming they have a position superior to you, it may become more costly to defend. But even still you should not come anywhere close to $100k.

It does sound like you should find some experienced party to help you a bit as this seems like uncharted water for you.

Refer to your contract. If the contracted closing date has come and gone, issue the seller a time is of the essence closing demand letter. Give them a fair amount of time usually 5 to 7 days to cure the holdup and close with you. If they fail to execute than they are in breach of contract and cancel and walk away.

If you really want to keep the house, you need to have a better understanding of what is clouding the title. Is it a lien that they don't want to pay or is there an issue with their chain of ownership from the foreclosure process? There is story there, get to the bottom or it and figure out if it is worth waiting for. Either way ensure you cancel your contract properly if needed.

Title insurance on a small transaction is small, it is also always worth it.