Don't Be The "Test Case:" 5 Tips For Investors Severing Property Interests

DON’T BE THE “TEST CASE”5 Tips For New Real Estate

Investors For Severing Property Interests

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With the steady influx of property investors seeking to stake their claim in the

phoenix that is Detroit, comes various investment

property management challenges.

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Listed here are 5 common problems that new real estate entrepreneurs face

when moving to sever the property

rights of a delinquent property

owner or tenant:

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I. THE TENANT OR OCCUPANT WON’T LEAVE.

Avoid ‘self- help.’ Landlord ‘self-help’ for locking out an occupant is, with rare

exception, illegal and has serious financial and legal consequences. The same is true

for investors who seek to extinguish a mortgage or land contract.

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An eviction action is required when the former homeowner or perhaps even their tenant, remains in the property

after the foreclosure redemption expires. The mere fact that the

redemption period has expired does NOT give the lender rights to enter the

property.

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Shutting off utilities or changing door locks is considered ‘self

help” and can expose an investor to liability in actions of trespass,

property damage, and even emotional distress.

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SOLUTION: Legally sever the possessory interest by filing an action

for eviction and secure a judgement and writ for eviction. I know of several cases where an investor is ready to

close on the sale of their property, only to be sued by a former owner or tenant whose legal interest in the property had

not been properly extinguished.

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II. THE FORMER PROPERTY OWNER

OR OCCUPANT FILES BANKRUPTCY

Equally as serious as landlord ‘self help’ is when a creditor violates an automatic stay

after the tenant or homeowner files bankruptcy. An automatic stay halts all

collection activities and this includes eviction and foreclosure actions. The ‘stay’ has to be

lifted by a federal court order.

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Creditors, such as landlords and

mortgagees, who knowingly violate a

bankruptcy stay face severe fines,

sanctions, and attorney fees. They may

even have to pay damages.

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SOLUTION: Once notified of an occupant’s bankruptcy, stop any

and all collection efforts until you have a signed order “lifting

the stay”. When in doubt, consult with legal counsel.

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III. FAILING TO UNDERSTAND CHOICES OF RIGHTS AND

REMEDIESInvestors, particularly those who purchase out of

state properties, should know what type of property interest they hold and the legal rights

that the interest affords.In Michigan, mortgage holders do not have a fee simple interest in a property, only a lien interest.

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So when a former property owner abandons the collateral, an investor

cannot legally sell the home until they foreclose out the homeowner’s interest or

unless they obtain a Deed in Lieu of foreclosure.

More importantly, investors need to know which legal process to use in order to

accomplish a specific goal.

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SOLUTION: Investors should consult with a real estate attorney licensed

in the state where they plan to invest and clarify their legal rights before they engage in purchasing investment properties or pursuing

legal action.

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IV. PROPERTY TAX FORECLOSURE

It is not uncommon for investors to run up against property tax foreclosure deadlines as

delinquent taxes are an inherent part of purchasing distressed properties.

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Until proper due diligence is performed, it makes little economic sense to initiate any

legal actions for foreclosure, eviction or forfeiture, if the property would only be lost to tax sale before an investor’s legal action

is completed.

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SOLUTION: Perform a title search and make arrangements to pay the taxes before initiating

legal action.

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V. DEEDS IN LIEU OF FORECLOSURE

A Deed in Lieu of Foreclosure (“DIL”) is a deed executed by the homeowner that satisfies a loan in default in exchange for the mortgage

holder to forgo the foreclosure process. However, taking a DIL without performing a title search or without drafting the proper

supporting documents is rife with problems.

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A DIL is similar to quitclaim deed in that the mortgagee takes title to the property with all liens, encumbrances and assessments that the former property owner incurred on the

property. Sometimes the amount of liens are so excessive that it makes more sense for the

investor to foreclose on the property and pursue a deficiency action against the former

property owner.

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Second, specific legal provisions are required in the DIL documents, without

which, an investor can experience difficulties foreclosing out subordinate lien interests or in obtaining title insurance for a

later sale of the property.

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SOLUTION: Perform a title search and if you plan to take a DIL, don’t do so without having

a qualified attorney first prepare DIL documents.

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VI. BOILERPLATE OR SELF-GENERATED DOCUMENTS

There is an old adage that ‘ a contract is valid until someone legally challenges it.’ Property

investors are often surprised to learn that their self-prepared documents may actually violate federal or state laws. Unfortunately they only discover this at court placing their own legal

interests in jeopardy.

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Indiscriminately using online or “boilerplate” forms to prepare a land contract, private

mortgage, or lease back can be legally hazardous. For instance, selling back a property to a former

homeowner raises federal compliance issues under RESPA (Real Estate Settlement Procedures

Act) and leasing back a property to a former homeowner creates a landlord / tenant

relationship that ironically requires the investor to obtain a certificate of occupancy and make city

required repairs on the former homeowner’s home.

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SOLUTION: Rely on an experienced real estate lawyer to review and

draft the state- specific contracts that will be used in property

transactions. It will reduce future legal headaches, losses, and

uncertainties.

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CONCLUSION: Don’t be the ‘Test Case.” When

in doubt of how to legally proceed with

severing a former property owner’s rights,

it is best for the new real estate investor to

seek out an experienced real estate lawyer.

● Land Contracts● Investment Properties● Real Estate

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Since 1990, attorney David Soble has represented lenders, loan servicers, consumers and business

owners in real estate, finance and compliance matters. For over 25 years, he has been involved in thousands

of real estate transactions and has successfully negotiated and saved millions for his business and

consumer clients.

ABOUT THE AUTHOR

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31800 Northwestern Hwy.Suite 350

Farmington Hills, MI 48334Phone: (888) 789-1715

Disclaimer: You should not rely or act upon the contents of this article without seeking advice from your own, qualified attorney.