All Forum Posts by: Rob K.

In California, the delay defense against enforceability of a due on sale is not based on laches ( which is an “equitable defense where one needs to show not only unreasonable delay but actual prejudice as a result of the delay). The defense that applies is “waiver”.

Where a lender accepts payments on account of a transferee with full knowledge of the transfer and there is an "unreasonable delay" without any reservation of rights before attempting to accelerate under a due on sale clause, yes, the lender could lose the right to accelerate under a waiver doctrine. Mere acquiescence without a clear showing of the lender's knowledge would probably not be enough.

An example of a published case where a Court in California found for the transferee on this issue is Rubin v. Los Angeles Fed S & L (1984) 159 Cal. App 3d 292

http://scholar.google.com/scholar_case?case=3454139069171485509&q=159+cal+app+3d+292&hl=en&as_sdt=4,5

This is a case decided after passage of the Garn-St. Germain act and illustrates that state law can still apply on issues such as waiver of the right to enforce a due on sale clause even with the passage of the Federal Garn-St. Germain act.

But the practical problem in California, which is mostly a non-judicial foreclosure state, is that once the lender calls the note due, they will proceed with a non-judicial foreclosure sale. That leaves the laboring oar with the borrower who has to file a civil suit and request for an injunction to stop the foreclosure sale which is an expensive and uncertain proposition, depending on the facts available to show a waiver.

I would never look at it that way. Seems to me that in the event of default, the senior already has the leverage to motivate the junior to perform with its power to foreclose. It is the only leverage the senior has with the junior. Junior can either reinstate the senior and keep it current or not and deal with the consequences. Senior can exercise its business judgment on the timing to foreclose if there is a default. I still don't see how an agreement not to foreclose benefits the senior at all. All it does is tie its hands.

If this is a situation with a new money junior lien requesting a foreclosure forbearance in advance, this might cause the senior concern that the borrower is becoming unstable and the senior might look to exercise a due on sale or encumbrance clause in its security instrument.

I hope this doesn't sound to harsh, but why would a senior lender ever agree to this? Whats in it for them?

Maybe I am not understanding your question or the fact pattern that generated your question. 

The details for the gross receipts tax for California LLCs can be found in the box on the second page of the following link:

https://www.ftb.ca.gov/forms/misc/3556.pdf

Rob Cee, a few thoughts I would like to put down based on some of the due diligence points you have raised.

1) All the appraisals, bpos, etc. in the world will not IMHO ever be a sufficient substitute for either you or someone you inherently trust putting your feet on the ground and actually looking at the property and understanding up close exactly what you are funding. To a certain extent, this is a similar debate to the one on the boards where risk is talked about in local v. out of state investing.

2) “Owner occupied” is not the same as the consumer definition of “personal, family, or household” purposes. Case in point: I just passed on a loan in which the borrower was buying out siblings on an inheritance so her daughter could live there. Not owner occupied, but clearly a consumer loan. Some less than scrupulous brokers would create a “rental agreement” between borrower and daughter so that they could justify calling it a “business loan”. Don’t ever go there and always look beyond the paperwork to get a sense of what is really going on. Borrower will blame the broker for the false paperwork for doing this whether the complaint is justified or not, and that obviously impacts the lender.

3) If it is a true business loan, broker probably does not really need a NMLS endorsement.

Here are a few for the list that come to mind:

-Failure to check that Broker’s representation of nature and condition of collateral is correct;

-Failure to catch that Borrower is substantially overpaying for property;

-Failure to verify that Borrower statement of business purpose of loan is inaccurate (loan in reality is for personal, household or family purposes) making loan subject to consumer protection laws and disclosure;

-Failure to verify that insurance is sufficient and the type of policy that covers lender as insured for loss; or policy lapses after funding and servicer does not catch it;

-Failure to verify that broker or arranger is properly licensed such that lender exemption from usury is invalidated;

-Failure to monitor and require borrower to keep property taxes current;

-Title company e-mail gets “hacked” and you wire funds based on fraudulent e-mail

-Not understanding the limitations on your options and problems that come up with "fractional" (multi-lender) loans when they go into default

-And here is one for the books that actually happened:: arranger comes into possession of notary stamp and commits identity theft by convincing lender, brokers, escrow and title that she is the person who’s identity has been stolen.

I have been there a few times. You can’t really create any “rules of thumb” on what your expenses are going to be as each deal and nature of default is different and has its own characteristics.

On one of the few seconds I have made on multi-unit property, the borrower decided to turn existing carports into bedrooms and bathrooms without permits, got red-tagged by the city, blew it off, then got criminally prosecuted by the city. He walked away.

On that one, I had to exercise the assignment of rents clause in my deed of trust, take control of the property rents, negotiate with and bring the senior lien current and continue to service it, and arrange for management takeover while I finished the foreclosure. I bought it back on a credit bid.

Fortunately, the rents collected covered the properties expenses and the borrower's improvements were actually pretty well constructed. What followed was years of negotiation with the city to get as built permits, installation of some but not all of the original repairs and improvements the city wanted, a successful appeal of the county's pie in the sky tax reassessment, and a discount buy out of the senior lender after the FDIC seized them and sold the note to a big bank. I learned more than I ever wanted to about FDIC loss share agreements.

It took a lot of time and effort, and there was no doubt a lot of risk in the endeavor, but once I met the city’s scaled back requirements and got the property permitted it was a total win. I was originally in the deal for the income, but wound up with a very nice property. Private money lending is not for the feint of heart.

As you already have your LLC set up and defined, I am just wondering why you are incurring the costs, formalities, selection of trustee, potential financing hassles. etc.. of adding the land trust layer? Why transfer a property in your partner's name into a land trust instead of your LLC when you already have the LLC and its operating terms established?

Sounds good. I'm game.

Hi Ryan,

I too am a North County investor with rentals in Escondido.

Good timing on your purchase!