My name is Tod Snodgrass, with Creative Transaction Funding. We offer Commercial Earnest Money Deposit Option Funding (CEMDOF). CEMD financing is available on a nationwide basis.
Are you working on any deals in need of CEMD? We are happy to pay for referrals!
CEMD is for Commercial Property Wholesalers (CPWs).
NOTE: We have a separate CEMD program for commercial real estate buyers (not wholesalers). Please feel free to send a request for the “Buyers” CMED program.
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Are you an experienced CPW?
Do you have a potential, high quality double close deal that is ready to go, however you lack the cash needed for the CEMD?
We may be able to help. For deals that meet our standard criteria, we can fund the CEMD via a Joint Venture (JV)–a form of equity.
Executive CEMD summary:
1. Designed for commercial properties purchases.
2. CEMD is different from residential EMD because:
a. The (CMED) amounts are usually a lot higher;
b. Escrow time frames are usually longer, i.e. to allow extra time needed for due diligence;
c. They include an option period.
Case Study: Commercial Earnest Money Deposit Option Funding Program
A wholesaler (CPW) was seeking to flip a commercial property via a double close. He was buying the property for $10,000,000 and selling it to another party for $11,000,000.
The CPW (“B”) had the seller (“A”) under contract that included a 30-day option period. The CPW had the buyer (“C”) under contract and had already lined up the $10,000,000 purchase money he needed from a Transactional Funding Money Source (TFMS). FYI: With a double close, there are two separate escrows: A to B and B to C.
The CPW was required to come up with two different funding amounts to kick start the process: Option money and the CEMD funding. The Option fee (for 30 days) was $20 per day = $600, paid out-of-pocket by the wholesaler (CPW).
The CEMD was 0.01% (one percent) x $10,000,000 = $100,000. Since all the CPW’s cash was tied up in other deals, they came to our firm (CTF) for the CEMD. Once CTF confirmed that the wholesaler’s deal met our standard criteria, we agreed to fund the $100,000 CMED funding amount.
Two escrows were opened, A to B: seller to CPW for $10,000,000 and B to C: CPW to buyer for $11,000,000. Next, the CPW wrote a check to the seller for $600 to cover the option. CTF then wired $100,000 into escrow for the CEMD funding.
After a few days, the option was exercised, and the deal went forward. The buyer was instructed to wire $11,000,000 into the BC (second) escrow. Once the Escrow officer confirmed that the BC funds ($11,000,000) had been received, then the Escrow officer wired $100,000 to CTF since the CEMD funding was no longer needed in the deal. CEMD funds are always fully refundable because, by mutual agreement of all parties, they can never be allowed to become part of the purchase price (go hard).
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Next the TFMS wired $10,000,000 into the AB (first) escrow. The AB escrow closed, and the deed was recorded; then the BC escrow closed, and documents were recorded. Last, the Escrow officer distributed funds and documents to the different parties as follows: the buyer received a recorded deed to the property; the seller received $10,000,000; CTF received $50,000 as their 50% markup for the $100,000 they had previously provided; the CPW received $950,000 ($10,000,000-$50,000), less closing costs for both transactions, etc.
The U.S. industrial sector saw a lot of growth during the COVID-19 pandemic, starting in 2020. The growth was driven, in the main, by a surge in warehousing demand, which was fueled by e-commerce. Fast forward to now, stakeholders seeking new avenues for growth are shifting their focus more to the manufacturing sector as a potential source of new demand.
Commercial Real Estate Investors (CREs), as well as commercial real estate brokers/realtors, commercial lenders, etc. are seeing an increase in this vital area of the US economy.
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Recent data shows that U.S. manufacturers are increasingly moving production and operations closer to U.S. consumer markets. Across the industrial sector, onshoring and reshoring have grown quite a bit, post-pandemic, as companies adapt their warehousing and manufacturing strategies. The motivation is to reduce or eliminate supply chain vulnerabilities that were exposed by the COVID pandemic. Doing so should help to create a more resilient, and long-term industrial manufacturing process. At the same time, onshoring can help build added resilience into supply chains, reducing our dependence on foreign sources and mitigating geopolitical risks. Ongoing research by the Reshoring Institute indicates the U.S. lost five million manufacturing jobs between 2000 and 2014, much of it to China, in search of cost savings.
At first, the expense-reduction approach drove higher profitability, however pandemic-related supply disruptions underscored limitations to that approach, leaving many companies exposed. Not all industries and/or companies will return to U.S. shores, many will split their manufacturing between different geographic locations. After all, lower-cost goods can still be found overseas, but the current shift to U.S. onshoring signifies a gradual, strategic transition that appears to be gathering momentum over time.
Factoid: With its current momentum, onshoring will increase the size of the current U.S. manufacturing base by more than 10% over the next decade (adding roughly 500 million square feet), according to a report from Commercial Real Estate Development Association.
A. Impact on Industrial Real Estate
1. New or refurbished facilities. With the predicted explosive growth in AI-related technologies over the next decade, look for more advanced factories which can support high-tech production. This will require either building new structures which will appeal to advanced manufacturing owners/tenants and/or modernizing currently outdated facilities.
2. Increased demand for logistics. While the demand for manufacturing facilities is expected to be significant, the ancillary demand for distribution and logistics support that comes with all those new American factories, should positively impact the US economy as well.
3. New industrial hubs could see a return of the “factory town”. Older and/or large cities are not where most of the new facilities will be found in the future, according to the latest research. “Legacy” cities such as Chicago, New York, Detroit and among others, are not favored due to high taxes, excessive regulations, poor municipal services, outdated transportation infrastructure, high crime, lack of available modern factories, etc.
4. Downstream beneficiaries. As a result, many if not most brand-new factories will be found in rural and secondary markets. Shortly thereafter, vendors, suppliers and logistics facilities can be expected to spring up in those same rural/secondary areas to support the new facilities. All these factors taken together will see many new job opportunities come to the fore, thereby fueling growth in the respective local economies due to the “downstream” effects of all the new factory growth.
Factoid: According to the National Association of Manufacturers, for every $1.00 earned in direct labor income in the manufacturing sector, $3.99 in total labor income earned is added to the overall U.S. economy. Put another way, for every one worker in manufacturing, 4.8 workers are added in the overall U.S. economy. These figures represent one of the largest sectoral multipliers in the economy.
B. Increased demand for housing
The onshoring trend is not only increasing the demand for industrial space, but also positively impacting multifamily real estate where manufacturing is returning. For example, the construction of a new (or refurbishment of an old) factory typically creates a need for more multifamily rental housing, 1-4 housing as well as office space and light industrial properties.
CRE investors and real estate service professionals would be wise to keep a close eye on which states and local markets will benefit most from the coming boom that will eventually result from all these positive onshoring trends.
1. New construction. Onshoring means new workers. This creates an obvious need for new housing, i.e. multifamily to accommodate the growing population of needed workers in those manufacturing hubs.
2. Supplier businesses (to the newly “onshored” companies). Onshoring almost always attracts vendors, suppliers and other businesses that support manufacturing. This in turn can lead to the development of more real estate space, including single family residences for managers and executives of those onshoring companies.
3. Onshoring
a. Increases the demand for and development of more logistics locations, distribution facilities and data centers.
b. Can lead to improvements in infrastructure, such as updating the grid to support the utility needs (power, water, gas, sewage, roads) of those new factories, development of new shopping centers, strip malls, small industrial parks.
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C. Summary
While the Commercial Real Estate sector no doubt faces challenges due to economic and political uncertainties, pockets of demand/supply imbalances, and a potentially higher interest rate environment, the growing onshoring trend represents substantial opportunities for those who seize the moment. The assumption of course is that all these new factories will be competitive with already-in-place, overseas production facilities. The good news is that several U.S. regional markets are now showing that certain strategic U.S. government policies, as well as local (state, county, city) incentives and corporate initiatives are stimulating economic growth as well as job creation and viable real estate development. Those successful markets signal a potentially robust future for CRE investments, rents and values.
References: Forbes, U.S. Dept. of Commerce, National Association of Manufacturers, U.S. Labor Dept., Reshoring Institute, Commercial Real Estate Development Association
Due to rising interest rates, conventional funding from banks, hard money sources, etc. is becoming increasingly problematic for many Real Estate Investor Professionals (REI Pros). For example, say a REI Pro needs capital to plug a temporary financial hole—say $50,00 or $100,000 or $250,000 for a very short period of time, say just one day? Virtually no lender will provide funds for such a short period of time.
This is where a Short-Term Equity Financing (STEF) source can come in handy. STEF’s are not brokers; they are direct equity funders using their own private capital. They write the checks. The buck stops with them when it comes to final decision-making.
STEFs do not provide loans. Instead, a temporary Joint Venture Agreement (JVA) is created—a form of equity–with the REI Pro. The STEFs profit normally comes from a share of the REI Pro’s profit. Typical markup is 50% of the amount funded. If the STEF provides $100,000, they receive $150,000 in return. Obviously, all the paperwork involved has to be carefully crafted to offer maximum protection to all parties, with appropriate security and collateral issues spoken to successfully, which is why STEFs normally require that doc prep, title and escrow functions all be assigned to service vendors chosen by the STEF.
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4 STEF Case Studies
CASE STUDY NO. 1
Situation: A homeowner has fallen way behind with his monthly mortgage payments due to the fact that he lost his job. The bank recently sent him a NOD (Notice of Default) and the property is now in pre-foreclosure status. With insufficient time to fix up the place and subsequently sell it for top dollar, the homeowner has come to realize that he needs to prepare to move away from the residence, sooner rather than later. He reaches out to a local real estate broker who in turn puts him in contact with a cash buyer investor who is interested in purchasing the property—at a discounted price—via a double close (involving two separate escrows).
Problem: In addition to the overdue first position mortgage on the property, it is also encumbered with several liens: mechanics, HOA, property tax, as well as a lawsuit, including a lis pendens filing. The seller has no money to clear up the title, so it remains clouded, and the property remains unsold. Due to the high-risk factors involved, everyone (including the cash buyer) is reluctant to front the money to pay off the liens beforehand. The homeowner is stuck.
Solution: Seeking a way out of his client’s deteriorating financial situation, the broker reaches out to a Short-Term Equity Financing source for help with paying off the liens which created the clouded title logjam in the first place. Once all the pieces of the financial puzzle are properly in place (agreements and contracts signed, proper escrow instructions prepared, all monies needed for the deal are sent into both escrows), both closings can occur pretty quickly.
Result: The property owner came out OK via a cash-for-keys/deed-in-lieu arrangement with the cash buyer; the buyer got the property at a good discount from FMV; the STEF was amply rewarded for its involvement; and last but not least, the broker earned a 5% referral fee from the STEF (based on the amount that the STEF funded) for their time, trouble and expertise.
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CASE STUDY NO. 2
Situation: A General Contractor Investor (GCI) owns two acres of prime residential real estate, free and clear, with no loans or liens against the property. The land had already been successfully subdivided, entitlements are all in place, architectural drawings and plans are 100% complete for all the SFRs. Further, the GCI has already arranged a construction loan with a major bank for all the new houses, to be built one-after-another, in a series. The only thing left to do, prior to starting work, is to pay for the permits on the first few houses.
Problem: The wife of the GCI recently filed for divorce, tying up all the CGI’s assets, including the funds he had previously put aside to pay for the permits.
Solution: A STEF was brought in to provide funds for the permits. The STEF was provided with collateral via liens against the lots the CGI owned free and clear. Based on that, the STEF fronted the money for the permits, which had already been previously approved. By prearrangement, the bank providing the construction loan had agreed to “overfund” the construction loan in order to provide payback to the STEF for the funding they provided + the STEF’s markup.
Result: That same day, the loan got funded and the permits were issued. Construction soon got underway. It all turned out OK at the end for all parties.
CASE STUDY NO. 3
Situation: A property was part of an estate. The owner died and the property went into Probate. While the property had a lot of equity in it, there was still an outstanding first mortgage with a modest amount still due, which the court ruled in this case had to be paid off completely before Probate could close. Once probate closed, then the four beneficiaries could each receive their respective six-figure proceeds.
Problem: To say that the four heirs to the estate did not get along well would be an understatement. There was apparently long-standing bad blood between several different family members. The result is that, because of a total lack of trust, none of them could or would agree to pay off the amount due on the mortgage. It was a financial standoff.
Solution: A STEF was referred into the situation by an attorney. The STEF provided sufficient capital to pay off the one remaining encumbrance: the first loan, so the property could be sold a ready buyer.
Result: Probate was able to close; the property sold; the heirs got their money and STEF was paid off for its investment + standard markup. All parties walked away with a smile on their respective faces.
CASE STUDY NO. 4
Situation: A successful REI Pro owned several commercial and industrial properties free and clear. He recently identified an investment property he wanted to buy from a distressed seller. The REI Pro calculated that he could turn right around and immediately sell the property for a handsome profit, since it came with an extraordinary amount of equity. The REI Pro had the property under contract. Further, the REI Pro had already lined up a cash buyer to purchase the property. The buy and sell would only take one day to successfully accomplish.
Problem: The REI Pro, at that time, was “asset rich and cash poor”. He had no ready cash to use to buy the investment property he wanted to immediately flip. To further complicate things, he had recently defaulted on a bank loan, which had caused his FICO score to plummet. Due to the hit on his credit score, no banks in the area were willing to loan him the money he needed to buy the equity-rich property he had his eye on.
Solution: A STEF was brought into the picture who fronted the purchase price, once the REI Pro pledged several properties he owned in order to cross-collateralize the deal.
Result: It all wrapped up to everyone’s satisfaction.
NOW AVAILABLE:
A. We currently offer two different funding programs for professional real estate investors: Short-Term Equity Financing & Down Payment Assistance Funding.
1. We help make deals happen that might not otherwise close, absent our funding.
2. We are happy to pay you a 5% referral fee, based on the amount we fund. For example, if you send us a lead and we fund $100,000, we send you a check for $5,000 at closing.
B. Short-Term Equity Financing: As described above.
1. Are you a Real Estate Investor Pro (REI Pro) who has a property you want to buy, with a 70% LTV or better, but you lack some of the Down Payment (DP) money needed to close the deal? You need say, 25% DP, but can only come up with 10% and need 15% more (DP money?
2. The good news is if your deal meets our standard criteria (70% LTV or better = 30% or more equity in the deal, etc.), CTF can provide the missing 15% in DP funding. By not having to put out all your own capital into DPs–especially if you are low on cash–you’ll be able to do more deals. With your DP source already in place, it will shorten your time for getting positive confirmation from your primary lender, and for getting more deals successfully closed.
D. If you would like to receive free information about our funding programs, please send an email to:[email protected], with the following three lines of (your) info:
1. Full Name 2. Phone number 3. Email address
Any questions, please advise.
Sincerely,
Tod Snodgrass President Creative Transaction Funding LLC Providing Down Payment Assistance & Short-Term Equity Financing to investors, nationwide. [email protected]
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Whether you are an experienced Real Estate Investor (REIer) or are a newbie in this industry, there exist many innovative funding techniques you can use to finance current and future deals. Generally referred to as creative financing, these terms refer to alternative or unconventional approaches that REIers may choose to utilize to acquire investment properties, using OPM: Other People’s Money.
In today’s unpredictable real estate investor landscape, it is very important to have a range of funding options at the ready before you dive into a property investment deal. Let’s face it, to be a successful REIer takes money. It does not necessarily have to be YOUR money, but before you can successfully pull off a deal, chances are SOMEONE’s funds are going to have to be brought to the table. Plan ahead. Line up funds before you need them because they have to come from somewhere.
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Make sure, before you commit to any real estate deal, that you have all your web-footed waterfowl neatly arranged in a linear fashion.
A. Lease Option: You may encounter a situation where you are not ready yet (either experience- or financial-wise) to purchase a property, either for your own personal use or as an investor. That is where the lease option can work best. Doing so provides the opportunity to purchase a property at the conclusion of a pre-arranged leasing-type agreement. This approach allows you to potentially build up equity through monthly rent payments.
The landlord benefits by earning monthly revenue. Typically, and depending on specific contract terms, a portion of the monthly rent payment is credited toward the future down payment on the house. This technique normally works best in a buyer’s market.
B. Down Payment Assistance (DPA). Many REIers are finding themselves caught in a new type of financial squeeze when it comes to the percentage of the purchase price that hard money and private lenders require that they bring to closing, i.e. “Skin-In-The-Game” (SITG) cash.
Until recently, it was possible to secure, say a 90% loan from such lenders, with the borrower required to contribute the other 10% as their SITG capital. And while those terms are still available in some cases, many REIers are waking up to a new reality: They need to bring closer to 20%-30% SITG cash to closing in terms of actual down payment money, with a general average of around 25% DP money currently required.
Upping the SITG percentage is a risk-reduction strategy employed by lenders in response to what they perceive as new uncertainties in the real estate investment marketplace, on a go-forward basis. The reality for REIers caught in this new “liquidity squeeze” is that they now may need to potentially come up with tens of thousands or even hundreds of thousands in new (SITG) investment capital above what was previously required.
Without new SITG capital, the REIer cannot close on the deal. A potential solution to this new dilemma is what we refer to as “Down Payment Assistance (equity) funding”: This is where a third party provides the needed extra SITG/DP cash in return for a modest share of the profits. See below for info about DPA.
C. Seller carryback loan. Plainly speaking, this is simply owner-provided financing. The seller acts as the lender or bank, i.e. he carries a mortgage–usually a second position loan–on the property and collects monthly payments from the buyer. Such an arrangement can be a win-win for both the buyer and the seller. Often the buyer (an REIer in this case) may be willing to pay more than the asking price in trade for advantageous loan terms on a seller carryback mortgage.
Further, the buyer is often willing to pay a higher interest rate on the seller carryback loan than the seller could earn from a CD from their local bank. Also, should the buyer default, the (previous) seller can always initiate foreclosure action and take the house back from the second position. The buyer benefits since they don’t have to go through the arduous and time-consuming chore of trying to get a bank loan; this is especially true if the buyer has a low FICO score or other credit or background issues.
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D. Buying a property “Subject-To”. What this means is that the REIer essentially takes over the seller’s remaining mortgage balance (thereby effectively “assuming the loan”) without making it official with the lender. This is a popular strategy among REIers, especially in an era of rising interest rates, since the loan being assumed probably carries a lower interest rate compared to a new (bank) loan.
Savvy REIers often employ the Subject-To method to take the place of a hard money loan. However, most REIers limit the use of Subject-To loans to relatively short-term time frames, i.e. for a few months until the REIer can either refi the loan or sell the property as part of a fix-flip strategy.
E. Hard Money: A hard money loan refers to asset-based financing where the borrower receives funds that are secured by real property. In most cases, private investors are the biggest suppliers of hard money capital, which are then funneled through hard money brokers.
While the terms (interest rate, points, time frames) of hard money loans may vary, there are several common characteristics: they are usually easier to obtain vs. a conventional bank loan; credit scores and income verification are not as important as the asset value involved; they are usually for shorter time frames (say for 6-24 months); while they charge higher interest rates, the good news is that they often can fund pretty quickly if the deal is right. They usually focus on the ARV (After Repair Value) to determine the loan terms, including important factors such as the rehab blueprints, scope of work, etc. They usually prefer to work with experienced rehabbers who have a clear plan to repay the loan within the specified time frame.
F. Cross collateral loan. This REI method assumes you already own a rental property free and clear. You want to buy another rental property. A cross collateral loan allows you to use the 100% equity in the existing property as leverage to acquire the new property you want to purchase. With cross-collateralization, the lender places a lien on both the new property and your existing property. In this way, the lender receives adequate security should you default on the loan. Basically, cross-collateralization allows you to sidestep the normal down payment requirement and/or having to take out a brand new (bank) loan.
G. Retirement accounts: Use your self-directed IRA, Roth IRA, 401-K, corporate plans as investment capital, where it is legal, prudent and appropriate to do so. Utilizing a self-directed retirement plan can empower a REIer by boosting their retirement savings, one deal at a time. Since we are talking about your retirement money, an extra degree of caution is called for. You need to possess excellent due diligence and underwriting skills in order to properly assess the potential risks involved.
H. Cash-Out Refinance. If your personal residence has a good amount of equity in it, you can unlock that equity via a cash-out refinance by tapping some of that equity. Make sure you fully understand the implications of such a loan should things not go well with your anticipated new investment. A cash-out refi may feature (more) favorable interest rates compared to a hard money loan. Also, the interest you pay is tax deductible. You need to do a risk/benefit analysis before going down this road. Regardless, if a REI deal looks very promising, and you require fast capital to make it happen, a cash-out finance can be a good way to go.
I. 203-K Loan: This unique FHA mortgage enables you to finance both the purchase (or refinancing) of a house and the cost of its rehabilitation through a single mortgage or to finance the rehabilitation of their existing home.
1. Pros:
a. Lower credit score allowed b. Smaller down payment requirements (as low as 3.5%) c. Can provide temporary housing while a home is being repaired d. Lower potential interest rates, compared to similar loan types e. Ability to combine home purchase and renovations into a single loan
f. Low down payment and credit score requirements
2. Cons:
a. FHA mortgage insurance required b. FHA loan rates may be higher compared to conventional loans c. Process may require meeting with a 203(k) repair consultant d. More extensive repairs require more paperwork e. Potential for the additional cost of architectural assessments f. Property must be your primary residence g. You must live in the home for 12 months before selling or renting it out
J. More creative financing methods to consider include:
1. Approach friends, relatives, etc. Options can include debt or equity.
2. Equity investors. The advantage here is that you do not have to make monthly payments because there is no loan. When the deal is done, some sort of profit split is made to compensate the investor(s).
3. Credit card advances. This can be an expensive gambit. It is only to be undertaken when you are very sure of positive, short-term outcomes. The bank may charge several points and up to 29% interest rates, so be very careful with this one.
4. Joint venture: you bring the deal, they bring the money, split the profits at the end. This is a variation on an equity-type investment.
5. Hypothecate (borrow against) a mortgage note you own. Basically, you take out a loan by pledging the note, thereby using it as collateral to secure the loan.
6. Personal asset loans: pawn some jewelry; get a car title loan, etc.
Down Payment Assistance Funding Program
Are you a Real Estate Investor Pro (REI Pro) who has a property you want to buy, with a 70% LTV or better, but you lack some of the Down Payment (DP) money needed to close the deal? You need say, 25% DP, but can only come up with 10% and need 15% more (DP money.
The good news is if your deal meets our standard criteria (70% LTV or better = 30% or more equity in the deal, etc.), CTF can provide the missing 15% in DP funding. By not having to put out all your own capital into DPs–especially if you are low on cash–you’ll be able to do more deals. With your DP source already in place, it will shorten your time for getting positive confirmation from your primary lender, and for getting more deals successfully closed.
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The number of NOD pre-foreclosures
notices are on the rise. Fortune magazine reports they are up triple digits in
2022 compared to 2021. There are several factors causing the uptick: COVID
mortgage forbearance overhang, the current recession, rapidly rising interest
rates this year, etc. The increase in the number of homeowners and landlords in
trouble is causing a lot of (both note and property) investors to start taking
a hard look at how they can profit from these changes in the market.
Precautions include:
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1. Depreciating prices. For those who came into the investor market after the last downturn, you may not be aware that residential property prices in many markets dropped by 40%, from peak (2008) to trough (2012). Some areas/types of real estate dropped by even more. The cautionary tale is to be sure to build in enough equity in foreclosure properties you seek to acquire. In an up market, where prices are appreciating double digits every year, how much equity you initially acquire is usually not the first box you check as an investor. However, as the old saying goes: That was then, and this is now. Assuming the recession worsens, you need to build in more of an “equity buffer” into each deal to protect yourself from making no profit (or actually losing money) when you go to sell the property or note.
2. Judicial vs. non-judicial states. The number of virtual wholesale note and property deals are increasing nationwide; wholesalers need to be knowledge about what laws apply in the state in which the investment is being made. About half the states in the nation are what is referred to as non-judicial. That means they typically employ what are known as trust deeds and trust deed notes. The foreclosure is undertaken without using lawyers and judges. Judicial states usually require you to go through the court system to adjudicate your claim. Non-judicial states usually cost less and take less time to foreclose.
3. Beware of Land Contracts (LCs). An LC is an agreement in which the owner/seller of a property agrees to act as the bank and personally finance the sale for the buyer instead of going through a 3rd party, such as a bank or credit union. The buyer makes monthly payments to the owner, but does NOT receive actual title to the property until the last payment is made; and the last one is often a “balloon” payment, i.e. for a very large amount (that the buyer perhaps cannot afford to make).
As an investor (of a property or a
note secured by a property) who is about to step into this breach, you must
give careful consideration to the LC contract that the owner has/had with the
LC buyer. What you want to avoid is getting subsequently sued by the buyer
after you bought out the interest of the seller.
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For example, does the seller own the
property outright, or is he still making payments to a lending institution? If
the owner himself did not make regular payments for any reason, the property
can be foreclosed upon, leaving the buyer with a worthless contract and no
home. Land contracts also leave the new owner (you) tied to the property. If
the buyer stops making their payments, you become responsible for the
land—which means you could lose the property altogether if the buyer fails to
insure it properly or pay their property taxes.
All of these tricky issues must be taken into account when you are considering an acquisition that includes a land contract. You need to have a very clear understanding of everyone’s rights and responsibilities beforehand. To play it safe, retain legal counsel to look everything over first.
4. Watch out for Super Liens in 20 states. There are approximately 370,000 homeowner associations (HOAs) in the United States. Collectively, this represents more than 40 million households (or about 53% of the owner-occupied households in America). Statistically, about 26% of all Americans live in HOA communities. Typical HOA/association dues & fees run from $200-$300 per month—many charge more, some charge a LOT more.
In most states, when a lender
forecloses on a property in a HOA, and the property owner has also defaulted on
their association fees, odds are the condo association won’t get paid for those
debts. That is because a successful foreclosure action by the holder of the
first position mortgage typically wipes out all junior notes and many liens.
However, in about 20 states (see the list below), “super lien” laws have been
passed that protect the association from being wiped out completely.
A foreclosure by a bank or credit
union can take many months. During that time the HOA is not receiving the
monthly payments due to them. When the bank finally forecloses and sells the
property, and surplus funds are left over, the HOA (in a Super Lien state) can
typically petition the court to channel that money to the association, assuming
the association has properly recorded a lien.
So, if you are a note or property
investor, be sure to check carefully if the state in which you are investing
(and where you could potentially foreclose on a property) is a super lien
state. If so, you need to take that information into account, and build those
costs into your bid price for the note or property.
To reiterate, about 20 states allow
for some form of super lien. Each of the states has differing laws when it
comes to how an HOA lien becomes a super lien. You can learn more about super
lien states and their individual laws regarding super liens by looking up your
state statutes which can usually be found online. The following states allow
for super liens, or some version of priority liens for community associations:
Alabama, Alaska, Colorado, Connecticut, Delaware, District of Columbia,
Florida, Hawaii, Illinois, Maryland, Massachusetts, Minnesota, Nevada, New
Hampshire, New Jersey, Pennsylvania, Rhode Island, Vermont, Washington, West
Virginia.
What We Do: Provide 100% Joint Venture Funding, nationwide, to real
estate note and property wholesalers. Contact info: Tod Snodgrass, [email protected],
310-408-7015
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