I recently came across a blog by Camile Baptiste titled 3 Advantages of Buying Bank Owned Property (REO) (see Camile’s Blog HERE). I tweeted it out and said that it is totally false (follow me @dkblattneratty).  Maybe it isn’t totally false, but there are numerous reasons not to buy REO property.  Banks, as sellers, are extremely difficult to deal with.  Let me briefly enumerate my observations.

  1. Banks typically attach a multi-page addendum to the standard from contract used in a locale. The addendum, of course, disclaims any liability for anything that could possibly be wrong with the property. OK, “AS IS” is “AS IS”.  But the addendum changes customary contract provisions including times for inspections, responsibility for closing costs and rights regarding title.

 

The title issue can be a big one. In most areas in Florida, the buyer selects the title agent.  Banks, following foreclosure, like to control title.  In a recent REO transaction I handled for a buyer, the bank’s title company provided the title commitment and set the closing date.  However, the title commitment showed that the foreclosure was not complete and a subordinate lender was not properly foreclosed.  Therefore, the property had to be re-foreclosed.  Because we couldn’t control the process, it was difficult to first convince the title company and then the bank that re-foreclosure was required.  They wanted us to close!  Then, we had no ability to coordinate with the bank to assure that the case was progressing and the re-foreclosure took over 18 months.

  1. Banks don’t negotiate – anything. Their form is their form.  The deal is the deal.  If there is a problem later, they don’t negotiate.  During the same transaction, while waiting for the re-foreclosure, Hurricane Irma hit South Florida.  Though the contract was “AS-IS”, it also provided that seller shall maintain the property and deliver it in the same condition as of the Effective Date.  Additionally, there was a casualty/risk of loss paragraph.  Hurricanes were covered under this paragraph and seller had an obligation to spend up to 1.5% of the purchase price to repair damages, including removal of debris and trimming of trees following a casualty.  Of course, there was extensive damage and the purchase price was just under $1,000,000.  The bank did almost no clean up or repair.  The roof was severely damaged and had extensive leaks, yet the bank didn’t even put a tarp on the roof to stop the growing water and mold damage to the interior.  The pool pump became inoperable creating a green cest-pool.  A horse stable on the property was demolished and not cleared or re-built.  Fences were missing and trees uprooted.  Notwithstanding, the bank only agreed to a closing credit of only $10,000.

 

  1. Banks don’t close or make decisions as quickly as advertised. When a contract is submitted or a decision is required, the real estate agent will tell a buyer that the bank will respond immediately.  That is never the case as approval is not obtained locally.  An out of town asset manager makes the decision.  The asset manager has dozens of files on his/her desk and responds when he/she can, regardless of contractual deadline.  If buyer’s lender requires information or a signature, the asset manager doesn’t move any more quickly.  There is no “professional courtesy” afforded from the selling bank to the new lender.

 

  1. REO property is always in worse condition than advertised or than you observe. The foreclosed owner didn’t care for it and in fact, purposefully damaged it on the way out.  Bank will do the absolute minimum to maintain it while it owns it and will do nothing to repair it.  They hire local property managers or real estate agents to do these things and the local managers/agents spend as little as possible to maximize their profits under their contracts.

 

  1. Anti-flip provisions in REO sale contracts limit buyers. A large percentage of buyers of REO properties are flippers.  Many REO sale contracts restrict the buyer’s ability to flip.  These restrictions range from 60-180 days.

 

  1. Banks and asset managers are usually located out of state and therefore, unfamiliar with local law and custom. This causes additional delay and confusion.

These are but a few of the difficulties in buying REO property. Though the price is often attractive, these and other difficulties can cause a buyer time, money and lost opportunities which might offset the favorable up front pricing.  Think more than once before buying from an REO.

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        New York recently enacted the Abandoned Property Relief Act of 2016 (“Abandoned Property Act”), legislation designed to clean up derelict and unsightly abandoned properties, lost in the foreclosure process. New York, like many areas of the country, including Florida, is faced with the serious problem of homeowners who abandon their properties after giving up their efforts to re-pay their mortgages and fight the foreclosure process. The properties sit abandoned, often stripped of all appliances and fixtures and in disrepair. There is no one maintaining the property and utilities are shut off. The properties become an eye sore to the community and adversely affect property values. In many neighborhoods, squatters may find a way in. Meanwhile, the foreclosure process lingers on. The properties have earned the name “Zombie Properties.”

             The Abandoned Property Act requires mortgage servicers of 1st mortgages to take specific actions to determine whether a secured property is vacant and abandoned and if so, the servicer must comply with the New York Property Maintenance Code. When a borrower becomes delinquent for 90 days, the servicer must inspect the property within 90 days and then every 25-35 days thereafter during the delinquency to determine whether the property is vacant. A property is deemed to be vacant if on 3 consecutive visits no one is present or there is no evidence of occupancy and the property is not being maintained. Once it is determined that the property is vacant and abandoned and not maintained, the servicer has 7 business days to take steps to maintain the property. The new law applies to state or federally chartered banks, savings banks, savings and loan institutions or credit unions which originate, service or maintain mortgages in New York.

             Florida has no comparable law, but zombie properties and foreclosures are a huge problem. In May of 2016, Miami-Dade, Broward and Palm Beach Counties had 651 zombie homes.

             The City of St. Petersburg has considered tackling its zombie problem on its own. The city is debating whether to foreclose on its code enforcement liens and unpaid assessments on zombie properties. Then, when properties are under city control, the city would hope to sell to homeowners who would improve the properties and occupy them. More likely though, lenders would bid at the foreclosure sale to protect their interest, driving up the ultimate sale price prior to sale to the end users and the improvement of the property. This could have the effect of limiting the amount available for investment into the properties.

             Legislation is pending in Congress which could take steps to combat the zombie property problem nationally. Representative Alan Grayson (D-FL) recently introduced H.R. 5108, the Zombie Property Relief Act of 2016 (“Zombie Property Act”). The Zombie Property Act would grant to the CFPB the authority to penalize financial institutions for not taking care of home they have instituted foreclosure proceedings upon. The Act would apply to any loan that is federally insured and is in foreclosure until ownership is transferred and a deed is recorded. Vacancy is determined by the owner providing written notice of its intent not to occupy and mortgagee having reasonable belief that the house is not occupied or there is an existing health risk.

             While the Zombie Property Act has great intentions, it is not as strong as the Abandoned Property Act. The Abandoned Property Act applies immediately upon delinquency (3 missed payments). The Zombie Property Act would not apply until the foreclosure suit has been filed. This could be many months after delinquency. The Abandoned Property act imposes an affirmative burden on the mortgagee to go to the property and see if the borrower is occupying and maintaining the property. The Zombie Property Act relies on the borrower to advise the mortgagee whether borrower is vacating. Why would the borrower do this? There is no incentive for the borrower to do so.

             A federal law relating to the maintenance of zombie properties is needed to protect property values and neighborhood. But, amendments are needed to the proposed Zombie Property Act. Congress should look to New York’s Abandoned Property Act for guidance and take appropriate action. And while we’re at it, the Florida Legislature should get involved and enact similar legislation.

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         Following the housing crash in 2008-2009, a big part of the recovery was due to investors buying foreclosed single family homes and turning them into rental properties. While this investment had historically been a favorite market for investors, prior to 2008, much of this activity had been limited to lower income neighborhoods.  With the foreclosure boom, investors had a greater access to an entirely new inventory or properties, moving into higher income, middle and upper class neighborhoods.  No neighborhood was exempt from foreclosure and therefore, no one was exempt from having a revolving door of tenants as neighbors.

        Investor funds, so-called “vulture funds”, REITS and local house-flippers moved heavily into the market. As a result, lenders and their REO holding companies were able to quickly reduce their unwanted inventories.  At first, prices were low, but as the economy improved and more bargain hunters got in the game, competitions prevailed and prices began to rise.  But demand for rental remained (and remains) high.  So rents could support the higher prices in all neighborhoods.

         The increase in prices helped non-foreclosure owners. They were able to finally sell or refinance.  Many sold to those same investors, adding more rental product to the market.

          As a real estate attorney, the increase in activity was a relief from those lean years. Residential real estate closings became more frequent.  While it was and continues to be difficult to do closings with the institutional rental investors, the initial surge in closings was welcome after the crash.

        However, as a homeowner who lives next door to a house owned by an institutional investor/landlord, I am less than happy and am hopeful that the high price of homes in my neighborhood will encourage the owner to sell the house to a permanent owner who will occupy it. I have no reason to believe that the trend will reverse any time soon though.

         We have owned our home for over 20 years. It is in a quiet gated community in a suburb west of Hollywood and Ft. Lauderdale and northwest of Miami.  When we moved in, all of the houses on our street and the surrounding streets were occupied by families with young kids like ours.  It was a kids’ paradise.  As the kids have grown up and moved out, some of the empty nesters have sold to young families. Others, like us, have not yet made that move.

        The house next door to us was always the “problem” house on the block, as far as upkeep goes. The original family was a single mom with 3 kids who struggled to make ends meet, so upkeep was not the top priority.  When she sold the house about 8 or 9 years ago, she sold to a family who I think never owned a home before because they did nothing to take care of it.  They would have parties all the time and at all hours of the nights.  Teenagers, probably drunk, would tear out of the house, get in their cars with the music blasting and speed away, wheels spinning and leaving track marks on lawns and on the street.

         About 2 1/2 years ago, that family sold the house. Rumors were that the family was in financial trouble.  A family with 6 kids moved into the 4 bedroom, 3 bath house.  At the time, we didn’t realize that they were renters.  As they were moving in, workers were cleaning up the landscaping and pressure cleaning (but not painting) the house.  Things were looking up.  But I got concerned when the grass wouldn’t get cut on a regular basis (you can’t go longer than 10 days in Florida in the summer or it will look like a jungle).  That’s when I checked the public records and found that a vulture fund owned the house (having bought from the prior owners at well below market) and my new neighbors were tenants.

        These neighbors moved out after one year and the house was only empty for one month. The landscapers showed up again.  Then a moving truck arrived.  I introduced myself to the neighbor and was delighted to learn that he was a transplant cardiologist at the nearby hospital.  He told me that he had already complained to the landlord about the condition of the house and wanted to improve it because he did not want to hurt property values.

        The grass stopped being cut about 8 weeks ago and the doc moved out about 6 weeks ago. I say the grass, but I mean weeds as there is no grass left.  So, I decided to look into whether the market trends would reverse and whether investors might start to sell.  The answer is not likely.  That is a mixed answer for me.  The homeowner side of me is disappointed and the lawyer side of me says good for business.  More closings, more legal work for banks and investor groups.  Morningstar reports in its December 2015 Single Family Research: Performance Covering All Morningstar Rated Securitization, that retention rates in 22 single family residential securitizations are at 70% and turnover rates are stabilized or declining.  In addition, occupancy rates are at 95%, the highest since 2000.  It would take a significant reversal of these trends for investors to sell.  And, as long as housing prices are high and climbing, renters aren’t going to be able to afford to buy.

        So, for the foreseeable future, I am going to have tenants as neighbors. And, I am going to be a busy attorney!  PS – just the other day, a for sale sign went up next door.  Maybe….

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        Those of us who have represented clients in default of their residential mortgages have often heard stories of how a bank representative told the client to “stop making payments” because they would have a better chance of getting a loan modification if the loan were actually in default. It wasn’t until the client followed that “advice” that the loan went into default, the foreclosure was filed and the outstanding debt became so high that not only was it impossible for the client to pay the debt, but it had become so high that the bank’s modification proposal, if one ever came, resulted in a payment plan higher then what the client started with.

         Often in these stories, at some point a bank representative (loss mitigation “specialist”) might suggest that the borrower make some modified payment while the modification request is being approved. These suggested payment plans aren’t offered in writing and no one from the bank ever signs anything.  The client might make these payments thinking that the loan has been modified and even with the thought that the foreclosure has stopped.

         This is exactly what happened in a recent Florida foreclosure, Ocwen Loan Servicing v. Delva, 2015 WL8347360 (Fla. 4th DCA) 2015.  The facts in this case are very familiar.  The loss mitigation representative told the borrower not to make payments while they worked on the modification.  After the foreclosure was filed, the bank told the borrower that the foreclosure would stop if he paid $6,200 and $2,000 per month thereafter.  These payments were made even though no documents were signed nor even presented to borrower.

         At trial, the court ruled that a modification had been entered into between bank and borrower and the court reformed the note and mortgage. The court agreed with bank that the Statute of Frauds applied, requiring a written agreement, but held that special circumstances applied and default was cured by the modification.

         The bank appealed and the court reversed finding that F.S. 725.01, the Statute of Frauds controlled. There was no oral modification.  No action can be brought on an agreement that is not to be performed within 1 year unless the agreement is in writing and signed by the person to be charged.  In this case, the note and mortgage were to be performed in as long as 30 years.

         The borrower argued that promissory estoppel applied to modify the mortgage. Promissory estoppel applies when there is: 1) a promise which the promisor should reasonably expect to induce an action or forbearance; 2) an action or forbearance on the promise; and (3) injustice resulting if the promise is not enforced.  The court was succinct.  Promissory estoppel can not ever circumvent the Statute of Frauds.

         Therefore, when negotiating mortgage modifications with banks, you must get everything in writing. Borrowers seeking modifications prior to default should not stop making payments if advised to by bank representatives.  I have been giving this advice to borrowers since the crisis began (fortunately, it is not advice I have to give very often any more).  Most borrowers disregarded this advice over the years.  But clearly, it is important.  Do not take action to change behavior unless the bank is prepared to sign a binding document.  There will be no relief to borrowers, regardless of the bank’s behavior.

 

Multi-family apartment construction has been the engine in real estate development in South Florida and nationally for the last several years. The South Florida skyline continues to sprout new luxury apartment towers from Miami to Fort Lauderdale to Boca Raton and West Palm Beach. Lenders can’t lend money fast enough for these projects.

At the same time, sale and construction of new homes have declined and institutional investors have purchased more than half a million single-family homes over the last five years for rental purposes. Many of these homes have been purchased directly out of foreclosure though more recently, these homes are being purchased not only pre-foreclosure, but on the open market. Single-family home rentals are increasing as their own asset class.

Lennar Corp, looking at these trends, has opened its first community of single family rental homes in Sparks, Nevada and has plans to construct approximately 20,000 apartments.

Is homeownership, once the American Dream, a thing of the past? Are developers and homebuilders changing their business models? Home builders changing to a rental model must re-evaluate and consider the structure of rental projects and the exit strategies. Developers who are already in the multi-family business need to consider this new customer – the former homeowner who has not rented in many years. What are his needs and how does that change what the developer must offer? How will these changes affect the development plan? Careful planning and documentation will be paramount going forward.

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