Typical issues faced by Real Estate Investors.

April 30, 2009



Typical issues faced by Real Estate Investors.

by James Miller

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These are some typical issues that I am faced with on a normal day and how I chose to handle them.

I grab the stack of papers from my desk on different Real Estate related “issues” I need to review.  I had set them aside last night, so I could focus on them today.

The first issue is my fault since I accidentally overpaid a bill (by $200) for a 20 yard dumpster that we were using at one of the construction sites. I have another account with the same company where I am getting billed monthly for a dumpster that I am providing at a rental apartment. I call to see if they can apply the overpayment to the other account.

I am a little apprehensive as this company has been less than friendly in the past, which has caused me to often wonder about the validity of the myth that the Mob is into waste disposal.  I am also worried that they will not have a record of the overpayment and I will have to prove it.

It turns out that they do have a record of it and they can transfer the balance, no problem.

My second issue is that on one of the properties we picked up “subject to” the existing mortgage, the lender (Wells Fargo) shot out two letters. One letter was about how the amount of hazard insurance coverage wasn’t adequate, and the other letter was about how the deductible amount on the hazard insurance policy was too high.

We have a few different policies for the properties we have, this property was on one of our business owners policy with a bunch of other properties that provides a total coverage of around a million dollars.

Their records indicated that we only have coverage of $2000 on the house, and that the mortgage balance was about $50,000 so we needed at least that much coverage.

My immediate concern was that since we are continually dealing with so many properties, we may have missed something and somehow inadequately insured this property.

The other letter from Wells Fargo indicated that we had too low of a deductible, and with a policy this size needed a deductible of no more than $100,000.  That seemed really odd to me since I would never have a deductible anywhere near that high on any property.  A deductible that high would mean that we would need to cover the first $100,000 worth of damage and their policy would kick in the rest.   Having a deductible that large is really like not having a policy at all.  It was confusing to me at best.

I grabbed a copy of our business owner’s policy and the other papers I needed and headed out the door to lunch with my girlfriend. On the way there we grabbed the mail.  I noticed that I got “proof of service” back on a Tenant-Buyer who was behind on payments to the tune of about $3000. I don’t usually let them get in to me that far, but his business is landscaping, which is seasonal, and he gets paid sporadically. He has been with me for four year and usually makes good on what he owes me when his clients pay him.

This time around he had gotten in too deep and did the worst thing possible, which was to not respond to my calls and letters. When I lose contact with a tenant and they owe me money, I am forced to file a small claims action for eviction and judgment.  The letter I received back from the sheriff indicated he had been served proper notice of his court date, but also told me that he had moved out and they had served him at his new residence.

Unfortunately he could have contacted me to work something out, I may have given him time, hell I may have lent him some moving money. I understand that life can throw you a bad shake. But now, my big concern was to get him out of the place so I can get it bringing in money again.   If we are communicating and on good terms, I find that things usually work out the best for both parties.

Since it didn’t happen that way, I am now worried about the condition that the house is in. My girlfriend and I make a plan to go review it.  I will bring the camera with in case I need to take some photos to tack on damages to the small claims action.

The other problem with the tenant just taking off is that I will still have to go through with eviction.  While I know he has a new place to live and can reason that it is certainly very likely that he doesn’t intend on coming back, I am not in communication with him so I can’t be sure.   This means that I while I can show it, I can’t rent it until the eviction is final.  I plan for a trip to the house and mentally brace myself for the worst.

At lunch I review the Wells Fargo letters and the insurance policy. I quickly realize the problem. The $2000 they have listed as the amount of hazard insurance we have, is actually the amount we have on just the storage shed on the property.  We actually have over $100,000 on the house itself.

I see that we also have a deductible of $250 and not over $100,000 like they had indicated. I make a call to our insurance agent to verify my information is correct (which it is) and to have him send yet another policy declaration page to Wells Fargo.

I then place a call to Wells Fargo to see if I can explain their mistake to them.  I navigate my way through the automated voice system, which makes me wade though an inordinate amount of choices before letting me know to hit “0” for he operator.

Once I get a real person on the line I run into a problem that faces most “subject to” investors. The name on the mortgage is not my companies name or my name, so they can’t talk with me.  I have been down this road a few times before. I let them know that there should be a Power of Attorney and a Right to Release Information on file with my name on it.  They verify that there is, and ask how I am related to the owner.  This is where it gets tricky, if I blatantly state that we have purchased the property, we can start down the ugly road of “due on sale” issues.  Most, if not all, mortgage documents have a stipulation where if ownership interest transfers, the lender can call the mortgage due.  Taking over a property “subject to” flies in the face of this, as the seller’s name remains on the loan, but the deed transfers.

I carefully pick my words and tell her that I am not related to the seller, but “calling on her behalf”.  These are the magic words that allow us to talk freely, but don’t get me transferred to another department because the place has been “sold”.

I explain the mistake that was made to the lady on the other end of the line, and even while we are talking Wells Fargo  receives in a declaration of coverage from my Insurance Agent, which eliminates these two issues.

That night my girlfriend and I make it to the house where the tenant bolted and find that it isn’t totally abandoned. The tenant isn’t there, but lights are on, there is a nice mountain bike on the porch and miscellaneous personal items strewn about.  I resist the urge throw the mountain bike in the back of the car to hold as a hostage, and instead walk around the outside of the place.

As I peek in the windows I can see that the furniture is gone, so no one is likely living there.  They were, however, kind enough to leave at least 30 trash bags full of beer bottles, cans, and junk in the back of the garage, in front of the garage,and strewn about the lawn.

As walk around to the front of the house I see that my girlfriend has already started putting up a “For Sale” sign in the yard.  While I commend her on her aggressiveness, I tell her that it is too early to put the sign up. I either have to get back in communication with the tenant and work something out with him, or wait for the eviction to be finalized.

There is no legal reason we can’t put the sign up, just a practical one. I understand that the tenant is just as unhappy about things as I am, placing a “For Sale” sign there will piss him off, and likely end up damaged or stolen. This guy has lived there for four years.  It has to be hard for him to give the place up, and is probably also embarrassing for him. A sign would just be like slapping him in the face.  The last thing you want to do is to aggravate a tenant while they still have control of your property.

She reluctantly removes the sign and puts it back in the car.

I give the tenant a call and leave a message asking if he would call me to see if we can work something out to possibly avoid court.  It weakens my position a bit to say this to him, but my first priority is to get him to a point where I can work with him so I can fast track new tenants into the place and get it cash flowing.

My idea is to work out some sort of payment plan with him on the money he owes me and get him to move his trash and other stuff out of the place.  In return for this I would lessen the amounts owed, and temporarily fore go court as long as he held up his end of the deal.
This is a great offer for him as he is otherwise facing at least a $3000 judgment and having me garnish his wages for payment.

I would let him know all of this if I could talk with him, but so far he hasn’t called.

In some cases you can’t even get the horse to water, let alone make him drink.

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One to watch out for with “Subject To” investments

April 7, 2009



One to watch out for on “Subject To” investments
by James Miller

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“subject to” refers to the purchasing of a property “subject to” the underlying debt.  A great way to purchase, if you can, as the mortgage and note stays in the sellers name, but the property deed transfers to the new buyer.

There are a few tricky parts when buying property using this method; First, the seller has to have a great deal of trust as the buyer holds all the cards  and second, there is a due on sale clause in most if not all of today’s mortgage documents that allow the lender to accelerate the mortgage if equitable interest in the property shifts to a someone other than the person on the mortgage.

In practice, as long as the mortgage is being paid, the last things a lender wants to do is to accelerate the mortgage and turn his performing note into a non-performing one.  It can happen in theory and give the subject to investor some things to worry about when it comes time to communicate with the lender.

Lenders cannot communicate with anyone whose name is not on the mortgage without getting a Authorization to release information and for changing anything like contact information, a Limited power of attorney with regard to the property is needed.

I recently realized a potential mistake I almost made with regard to a subject to transaction.

We purchased a house from a woman who wanted to sell, but her mortgage was already at the market value of the home. She deeded the property over to us “subject to” the underlying mortgage.  Unlike most sellers facing foreclosure who are very grateful that they can sell their property any way possible, she tended to fight us on every little detail of the transaction and generally seemed to be difficult to work with.

I dropped the ball on getting our insurance information to the lender in a timely fashion and the lender placed their own hazard insurance on the property, deducting the double priced premium payment from the escrow account.

I wrote a letter to the lender providing our insurance information and asking that they refund the premium amount to the escrow account, or apply it to the balance of the mortgage.

I then forgot about the situation as more pressing fires caught my attention.

A short while later I received the mortgage statement for the property in the mail from the seller, as the lender had not yet changed over to using our contact information. It often takes them a while to do this.

In with the statement was a letter from the lender acknowledging my letter, and indicating acceptance of our insurance and cancellation of theirs.   However on the mortgage statement I didn’t see where the amount had been credited back to the escrow account, or deducted from the principal the loan.

I thought it was strange that the lender would comment on the situation, but not reflect it on the statement.

I  realized right then where I had created an Achilles heel.

What if the lender sent a check back to the original seller?  The mortgage would still be in her name, so the check would likely be written out to her as well.

She was still receiving and opening the statements from the lender so she could actually remove the check and forward on the rest of the statement to me.

She already seemed disgruntled by the whole process, so I realized that it would be easy for her to justify (and also hard to forward onto me) a check for over a thousand dollars that was made out to her.

My position on it was that I took over the property (including the escrow account) as is. I actually even caught up her back payments and have made a half dozen or so since then, so the escrow money was also money that we put into the account.

Her cashing that check would be no different than her coming back over to the place and removing a few windows.

It’s just a lot easier to cash a check.

Since the property was purchased with her name still on the mortgage, I could, in theory, threaten to stop making mortgage payments until she paid the money back to the escrow account.

This would place her back in the pressure position of again facing foreclosure.

The problem with that ethically questionable tactic was that I had already placed a tenant buyer in the property. I couldn’t risk losing the property to foreclosure and then getting sued by the tenant buyer for not fulfilling my end of the deal.  As long as the tenant buyer was in place and current on their payments  I would have to keep paying the mortgage.

This made that whole idea a non-threat.

I resolved to the fact that I would have to take her to court to try to get the money out of her. I was pretty sure that I could win, given I keep very good records and had been paying the mortgage for so long, but the case would be confusing to the judge as “subject to” is a somewhat atypical transaction in our rural location.

I decided that if she had indeed received and cashed a check I would negotiate to try to get her to keep some and send me the difference.  We would both be better off that way than  if I had to take her to court.  Court would also completely sour our business relationship.

As it turned out, all of my worry was for naught. When I called the Mortgage Company they had already credited the escrow account with the money, it had just not made the last statement.

It was however an interesting (and panic stricken) mental exercise.

With Real Estate it is easy to let something slip through the cracks that can cost you quite a bit.