Purchasing foreclosed real estate has never been easy or risk-free. In Ohio, all purchases are “AS-IS” and purchasers generally do not have an opportunity to inspect the property. A 10% cash deposit is due upon bidding and payment in full is due within thirty days with the threat of contempt of court if the purchase price is not paid. And the risks to purchasers are increasing.
Recently several banks have elected to stop residential foreclosures due to questions about their internal procedures. The attorneys general of all 50 states are now conducting a joint investigation into possible false or unverified information contained in affidavits and improper notarization of affidavits. Remedies for homeowners whose homes have been wrongfully foreclosed are determined by state law, but may include an unwinding of the foreclosure and returning legal title to the borrower. But what happens when that home has been purchased by a third party at foreclosure sale? Or flipped to another owner?
On February 3, 2010, the Board of the American Land Title Association (“ALTA”) voted to decertify the existing ALTA Endorsement Form 21-06 (Creditor’s Rights). Almost immediately, two of the largest title insurance underwriters, Fidelity National Title Group (including its subsidiaries Chicago Title, Fidelity National Title, Ticor Title, Lawyers Title, Commonwealth Land Title, Security Union Title & Alamo Title) and First American Title Insurance Company changed their underwriting policies to no longer issue the Form 21-06 or to provide any other coverage for claims arising from bankruptcy or insolvency within the insured transaction. Stewart Title Guaranty is reviewing its underwriting policy in light of the decertification by ALTA. At this time, Old Republic National Title Insurance Company will continue to issue the endorsement, however, it will now charge a financial review fee related to its due diligence prior to issuing the endorsement which is separate from the endorsement’s premium. As was the case prior to the decertification of the endorsement by the ALTA, due to the risk involved for the underwriter, the issuance of the endorsement is not guarantied and should not be expected in all cases.
The Creditor’s Rights endorsement is often requested by lenders to provide coverage for claims arising from the insolvency or bankruptcy of a party in the transaction. It arose when the 1992 form of ALTA policy created a new exclusion from coverage for insolvency or bankruptcy in the chain of title. The 1970 form was silent on the issue. The 2006 policy, in use today, scaled the exclusion back so that it only applied to the current transaction and did not provide exclusions for bankruptcy or insolvency in the chain of title. The current loan policy excludes coverage for “[a]ny claim, by reason of the operation of federal bankruptcy, state insolvency, or similar creditors’ rights laws, that the transaction creating the lien of the Insured Mortgage, is (a) a fraudulent conveyance or fraudulent transfer, or (b) a preferential transfer for any reason not stated in Covered Risk 13(b) of this policy.”
Without the ability to obtain the Creditor’s Rights endorsements, lenders need to perform more of their own due diligence prior to loan closing. Transactions which deserve extra scrutiny are those (i) where less than 100% of the loan proceeds are used to purchase or refinance the property or construct the improvements; (ii) between related parties; (iii) where the consideration does not appear to be market or includes something other than cash consideration; and (iv) where the seller appears to be insolvent or a bankruptcy matter is currently pending. In cases where a lender would have previously requested the Creditor’s Rights endorsement, lenders should consider requiring, as a condition of loan closing, its borrower and borrower’s seller to execute an affidavit addressing the nature of the transaction, their solvency and the flow of funds.
It was reported this week in Crain’s Cleveland Business that the Blue Heron Golf Club in Medina County is for sale. The golf course, only four years old and ranked in 2006 as one of the best new courses in the country, is surrounded by a residential development consisting of more than 400 home sites.
Residential developers and new home builders have been two players in the market hit hardest by the current credit crisis and rising unemployment.
Park use is one alternative which could complement neighboring residential development. The 2007 sale of Orchard Hills Golf Course to the Geauga Park District is a prime example of a golf course being converted to a use that successfully preserves the green spaces and recreational aspects of the property.Continue Reading...
On November 26, 2008, LandAmerica Financial Group, Inc. (“LandAmerica”) and its affiliate, LandAmerica 1031 Exchange Services, Inc. (“LES”) filed for Chapter 11 protection from creditors. LES abruptly ceased its 1031 exchange intermediary business two days prior to the bankruptcy filing and LandAmerica sold its Lawyers Title and Commonwealth Title underwriting subsidiaries to Fidelity Title and Chicago Title shortly after the petition date.
Monday, April 6, was the deadline for creditors in each case to file their bankruptcy claims. A review of the filed claims in each case tells quite a tale of woe, with the 1031 exchange customers of LES hit exponentially hard.
As a 1031 intermediary, LES held proceeds from the sale of its customer’s “relinquished property” for 180 days or until “replacement property” was purchased if earlier. For an extended period, LES had been investing its customer’s sales proceeds in auction rate securities (“ARS”), the market for which froze in February 2008. By November, LandAmerica could no longer fund the cash needs for replacement property purchases and this led to the Chapter 11 filing.
Customers who were in the middle of their 180-day replacement period awoke to find that their cash proceeds were not only unavailable (and likely tied up long term in illiquid investments) but that they would not be able to obtain their planned tax deferral under Section 1031 of the Revenue Code. If that was not injury enough, many of these customers already had replacement properties firmly under contract and suffered the insult of potential breach lawsuits by the sellers of those properties.
One LES creditor’s claim is reflective of the many similarly situated customers. Deblu Realty Corporation had almost $1.5 million deposited with LES from the sale of relinquished property, but its proof of claim was not only for that amount but for $373,000 in lost deferral of taxes (at capital gains rates), $3.7 million in potential lost profits on the thwarted acquisition of replacement property as well as yet to be determined amounts for alternate financing costs and legal fees.
I continue to be amazed at the reaction I get when I recommend to clients that they purchase title insurance as part of a real estate transaction. Granted I could be considered biased as I am a licensed title insurance agent, clerked in law school by searching titles in Franklin and the surrounding counties and spent the first 2 years of my legal career as an underwriting attorney for Chicago Title at their headquarters in Chicago. Generally, lending clients have accepted title insurance as a must; but not all developers and residential purchaser's have seen the light; notwithstanding the Erpenbeck situations which arise from time to time.
So, if you are not yet convinced that title insurance should be a necessary component of your due diligence and closing requirements, below is a list of 73 reasons why you should change your mind which has been assembled by Stewart Title and Lawyers Title at their website Know Your Closing.com. Most of these items can be located by a search of the public records, but not all.
You know how you can smell the familiar scents of the changing seasons in the air ? Well those of us who have the honor to have survived a career in the real estate industry have recognized the smell in the air for some time. Right now that smell is pretty offensive; but we know from experience that it is going to turn sweet before you know it ! Recently, I was speaking with Mark Sinkhorn of Lawyer's Title Insurance Company National Services Division in Columbus, Ohio who reminded me that back in 1980 when the economy was experiencing record inflation and the only transactions we were doing were land contracts; and more recently in 1987 and 1994 there was a similar collapse in the lending market. In all instances, the economy and real estate industry rebounded .
Today, other than for some condominium developments in larger markets, the commercial real estate market is not over-built and once credit frees up again commercial development should lead the way as businesses expand their operations. In the mean time, manufacturing and distribution operators might wish to consider sale-leaseback transactions as an alternative to creating cash and moving assets from on balance sheets to off balance sheets. Sale-leaseback transactions properly structured are a "win-win" for both the developer (buyer/landlord) and the company (seller/tenant). Residential sellers might consider loan assumptions, seller purchase money mortgages and land contracts once again as tools to move their properties. There is a lot of room for creativity in commercial and residential property transactions, but care should be taken in the structuring of the same.