Archive for the ‘Real Estate Law’ Category

Foreclosure and Two Ways to Avoid Going Through It

Tuesday, October 21st, 2008

Foreclosure means that a borrower can not make the required principal and/or interest payments on a loan secured by an interest in property.  Because of the borrower’s default, the lender has a right to terminate the borrower’s interest in the property.  The procedures vary from state to state, but the end result is that the lender either can take ownership of the property or sell it and the borrower’s equitable or statutory right to redeem the property is barred forever.

Approximately 95% of all residential mortgages in the United States are being paid on time.  That means that there are problems with about 5% of mortgage loans.  If mortgagors (e.g., the homeowners / borrowers) do not pay their mortgage loans, they will lose their homes.

Two other options exist for those facing foreclosure.  First, the borrower can offer a deed in lieu of foreclosure.  This means that instead of waiting for the foreclosure process to occur, the lender consents to accepting the borrower’s property interest immediately.  If the value of the property is below the remaining mortgage debt, the lender usually agrees to forgive the difference.

The second option is known as a “short sale.”  In this case, the borrower sells the property for less than the remaining mortgage debt.  The lender’s consent is required and, as in a deed in lieu situation, the lender usually agrees to forgive the excess owed on the debt.

In both options, the homeowners lose their homes.  Yet, this still can be preferable than going through foreclosure.  First, it takes less time, so the home owner who knows there is no way he can keep his home can shorten the process and the pain.  Second, the home owner also will no longer be legally obligated to pay the debt.  Third, if a foreclosure occurs and the home is later sold for less than the amount owed on the debt, some states allow a lender to pursue the unpaid amount.  However, with deed in lieu or a short sale, the lender almost always consents to forgive any remaining debt.

Real Estate Investment Trusts

Monday, September 15th, 2008

As a follow up to my last post noting that hard assets, such as real estate, tend to be good inflation hedges, I wanted to provide some basics on real estate investment trusts (“REITs”).  A REIT is an investment vehicle that owns either mortgage notes, real estate or a hybrid that both mortgage notes and real estate.

REITs came into being in 1960.  Most REITs at that time were mortgage REITS – they owned mortgage notes on real estate assets.  However, today, real estate and hybrid REITS are common.  Via securities, a REIT allows one to invest in large, income-producing real property.  That said, REITs come in a variety of flavors and can be sliced and diced a number of ways.

In the United States, three types of REITs as securities exist.  Publicly-traded REITs register with the U.S. Securities and Exchange Commission (the “SEC”) and trade on national stock exchanges.  The are also non-exchange-traded REITs, which also register with the SEC, but which don’t trade on a stock exchange.  Finally, private REITS neither register with the SEC nor trade on a stock exchange.

Additionally, REITs may be distinguished by the type of real estate they invest in.  This can be either broad or narrowly-focused.  For example, there are office REITs, multifamily property REITs, hotel REITs, shopping center REITs, warehouse REITS and storage facility REITs.

Another way a REIT may differentiate itself is for it to focus on a specific state or geographical region.

Companies must qualify to be classified as a REIT.  To do so, they must meet specific requirements of the Internal Revenue Code.  These requirements include the following:

* The REIT must be managed by a Board of Trustees or a Board of Directors.

* The REIT must be taxable as a corporation.

* The REIT must have 100 different shareholders.

* No more than 50% of the REITs shares may be held by five or fewer individuals.

* REIT shares must be fully transferable.

* At least 75% of the REIT’s gross income must be real estate-related, such as from rents or mortgage interest.

* At least 75% of the REIT’s total assets must be real estate assets.

* The REIT’s stock in its taxable subsidiaries may not be more than 20% of its total assets.

* A REIT must distribute at least 90% of its taxable income to shareholders as dividends.

These are some, but not all, of the main limiting characteristics of a REIT. A good book on real estate syndication in general, including REITs, is Samuel K. Freshman’s Principles of Real Estate Syndication.