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Should I be afraid of Zombie Real Estate?

JohnMenszer-0690It happens so often. I ask clients if they own a home and they say, “No, but I am buying one from the bank.” There is a popular misconception that when you are paying a mortgage, you don’t own the property until it is fully paid for. In fact, when you buy a piece of real estate on credit you are owner from the time the ink dries on the paper.

The three essential documents involved in a credit purchase of real estate are: the Act of Transfer, the Note and the Mortgage. The Transfer, also known as the Deed, transfers ownership from the seller to the purchaser. The Note is a statement of the amount the purchaser owes and the terms of repayment. The Mortgage is a security agreement that ties the note to the real estate, giving the lender certain rights over the property. Among those rights is the option to foreclose if the Note becomes delinquent.

Notice, I said “option to foreclose” because here is where the Zombie Real Estate comes in. There are unknown numbers of these foreclosure horrors where it is the bank’s refusal to foreclose which sets the owner down the path to perdition. Zombie Real Estate is property that nobody wants which keeps racking up costs for the owner.

I read of a property owner in Ohio who fell behind to JP Morgan Chase due to ill health. He received a foreclosure suit and proactively moved out before the date of the sheriff sale to live with his daughter. Then the bank quietly dropped the suit. Two years later he started getting bills for taxes, waste removal, weed control, and was threatened with demolition costs.

In depressed markets banks are walking away from properties. If they foreclose they have the legal costs and the expense of keeping up the real estate owned (known in the trade as “REO’s). In not foreclosing the bank can reap accounting and tax benefits from the government and sell the debt at a deep discount to debt collectors, who then hound the owners.

In my practice I once had a case of Zombie Real Estate in a bankruptcy. A client had a piece of investment real estate that he wanted to give back to the lender, as well as a lot of hospital bills and other debts that justified filing a Chapter 7. We filed his case and listed his intention to surrender this property to the bank. Unfortunately, before the lender could foreclose the property was damaged and the lender decided not to foreclose after all. The wrecked property sat for years with the City racking up liens and charges. The Note on the property was discharged in the bankruptcy, but since the City’s liens and charges dated from after the bankruptcy they were fresh obligations to the debtor.

You can’t force a bank to foreclose if it doesn’t want to and you can’t make them accept a donation, a dation or a quitclaim, unless they sign the document. What you own may not be so easy to get rid of.

 

What is a Purchase Agreement and why is it important?

JohnMenszer2-Crop_-0761For a buyer or seller of real estate the Purchase Agreement is a critically important document. It is the rule book or ”road map” for the transaction. Most people sign their Purchase Agreements without reading or fully understanding what they are agreeing to. Then, if there is a bad outcome, they call an attorney and want to get out of the contract.  It may be too late.

There is a Standard Agreement that is in common use among the real estate brokers and agents in New Orleans. It protects the commission of the realtors and splits the penalties between the buyer and seller roughly down the middle. It sets out the conditions for property inspections and financing. In a private sale it is not necessary to use this Standard Agreement. A seller or a buyer may decide they want to use a contract that is more favorable to them or meets their special needs. This is permitted. Or, the Standard Agreement can be modified with additional terms and conditions.

A real estate deal is a complicated venture involving property inspections, financing, appraisals, warranties, title issues, timing of events and a significant deposit. Many things can go wrong. As a result penalties can kick in and property can be tied up in litigation.

Consulting with a real estate attorney prior to signing a Purchase Agreement or hiring a lawyer to draft a modified or custom contract is time and money well spent.