Friday, July 27, 2018

How To Approach A Defaulting Second Mortgage


Default happens, hopefully not often, but it is a fact of lending. Upon default, however, a holder of a second mortgage must find an objective, value-driven manner in which to evaluate its options. Unfortunately, in many instances second position lienholders opt for one of two extreme approaches—accepting a nominal amount in exchange for the release of the lien or demanding an unreasonably high sum for satisfaction of the lien. Both approaches are harmful for different reasons. Despite such prevalent behavior, with proper management, a defaulting second mortgage can provide a lienholder with a number of options.


So, You Agreed To Be Second

Financing a second mortgage is making a conscious decision to maintain an interest in a property that is subject to the interests of the first lienholder. The most cogent concern of a second lender is that upon default of the first mortgage, all of the second lienholder's interest can be extinguished. Such subordination is not only a concern at default, but an ongoing concern, as any changes to the property or its rights that the second position lender would like to make may possibly trigger a default in the first mortgage. 

Upon default, the relationship between the first and second lienholders undergoes a slight alteration. To understand this shift, it is probably most beneficial to think of a second position lien as converting into an option or right of first refusal upon default. When either mortgage is in default, the second lien holder has to assess whether it wishes to incur the cost of litigation, in the case of the second lien’s default, or satisfaction, in the case of a default on the first mortgage. In the same manner, the money lent for the second lien can similarly be seen as the cost of the option, which bears interest for the lender. Viewing its lien from this property rights perspective will enable the second lien holder to conduct an objective risk-weighted cost-benefit analysis of the second mortgage.

Which Approach Should Be Taken Upon Default?

When it comes to defaulting second mortgages, objectivity is essential. Accepting a nominal payoff leads to lost profits. Alternatively, overly aggressive demands for a payoff will lead to either foreclosure of the first lien position and extinguishment or a longer period of nonpayment, followed by ownership of the property subject to the first mortgage. An active approach is necessary to avoid entering either situation unwillingly. Second lien holders should assess the value of the property and determine if the remaining equity after satisfaction of the first lien and additional litigation/acquisition costs makes the exercising of the lien holder’s rights worth the cost of doing so. In addition to this course of action, it is important for the second lienholder to understand the secondary market pricing for performing second mortgages, defaulting mortgages and the typical payoff discount for defaulting second mortgage in the property’s local area. The state of title of property is also an important determining factor. Armed, with this information, a second position lienholder can make an informed decision on how it will proceed upon default.

Unfortunately, second lienholders and their authorized agents are not always optimally informed at the time of default, leading to frequent instances of idiosyncratic behavior. That said, I thought it prudent to provide my take on how to approach the default of a second position mortgage. Please feel free to provide your prospective on the matter below.

Wednesday, July 25, 2018

Real Estate Crowdfunding

Real estate crowdfunding has been a hot topic for the past few years and continues to gain notoriety. Praised for its flexibility and low barrier to entry, crowdfunding enables investors to directly invest in real estate properties without having to amass the funds necessary for a mortgage down-payment. For an amount as low as $500, in some instances, investors can contribute to a pool of investor capital that will enable a real estate entity to acquire a property. Open to both accredited investors and the public at large, crowdfunding offers access to the risks and rewards of direct real estate ownership in a passive manner with relatively little out-of-pocket costs.

Why Didn’t This Happen Sooner?

Crowdfunding is not a new idea, real estate investors for decades have pooled money to purchase properties, in an attempt to share risk and/or acquisition costs. These attempts at crowdfunding typically took the form of private “offerings” of shares or interest in a real estate holding entity, such as a limited partnership, LLC or corporation. Such private offerings were frequently limited to the immediate network of the party organizing the offering for one primary reason—securities laws made offering such investment opportunities to the public onerous and costly.

The various federal and state securities laws that regulate investment opportunities in the United States all share one common motivation—to ensure that investors are given enough information to make a informed investment decisions during the offering of an investment opportunity. In an attempt to protect the public from overly complex investment opportunities that it may not fully understand, federal and most securities laws have classified certain classes of investments as too complex to be offered to the public. All other investments must undertake numerous steps to retain the transparency necessary for public investment, including distributing an investment prospectus, filing IRS form 10-K's annually and adhering to certain required accounting procedures, among other requirements. Complying with the various requirements of public offerings can be time consuming and costly, thus federal securities law offers certain exemptions from these requirements for certain non-public offerings. Most states offer similar exemptions in their investment laws, as well.

In the past, offerors of real estate investment opportunities were careful to ensure that their real estate offerings were structured in such a way that they qualified for the federal and state exemptions, as non-compliance with these laws could lead to stiff penalties and even criminal prosecution. In so doing, such offerings were limited to investor that fit the federal and state definition of “sophisticated.” This all changed, however, with the passing of the JOBS Act in 2012. This act expanded the exemptions offered under federal securities laws to include crowdfunding. Coupled with the 2015 SEC regulations on crowdfunding, the JOBS Act has served to facilitate the explosion of crowdfunding in general and real estate crowdfunding in particular.

Crowdfunding for All?

Real estate crowdfunding, with its open access to funding from the public at large, may seem the answer to all real estate funding needs. In fact, many crowdfunded projects are funded with equity or no-interest debt. This form of financing, however, is by no means a panacea for all real estate capital woes. First and foremost, all crowdfunding is limited by SEC regulations, which means that a crowdfunding offering cannot raise more than the current SEC limit of $1,070,000.00 within a 12-month period. Any additional funding needs will have to be obtained through other fundraising or financing efforts. Furthermore, crowdfunding offerors must also comply with various SEC and tax reporting requirements.

Types of Crowdfunding

There are many different types of crowdfunding offerings. In exchange for their investment, investors are able obtain equity in a real estate entity that acquires a property, provide loans or debt financing to an acquiring company or even become a limited partner in a small investment collaboration. Real estate companies have used crowdfunding in a myriad of ways from individual residential property acquisition to purchases of commercial property portfolios. Despite the various uses of the capital raised by crowdfunding, regulations on these offerings have led to similarities in the appearances and investor interfaces of most real estate crowdfunding portals. As such, most crowdfunding investors need only visit a crowdfunding portal to browse real estate investment opportunities available to fund. Companies such as Fundrise, Rich Uncle, RealtyMogul and Lending Home, among others, all offer access to real estate crowdfunding opportunities. The following articles provide more information on the most well-known real estate crowdfunding sites:



Not Crowdfunding, but…

In addition to crowdfunding, full-service real estate investor websites have also begun to gain popularity. These websites provide listings of properties available for real estate investment along with access to a myriad of support services to facilitate the purchase of the listed properties, such as financing, property management, etc. Companies like Roofstock, Own America and HomeUnion offer such investor listing services. Please feel free to check out the article below on real estate investor listing websites:


The key difference between investor listing websites and crowdfunding websites is that listing websites offer properties for purchase, whereas crowdfunding websites offer opportunities to invest in a real estate entity without directly owning a property.
At this point, it may be prudent to mention that passive investment in the real estate market is still possible through more traditional methods, such as real estate investment trusts (REIT’s), government sponsored entity debt (Ginnie, Fannie and Freddie debt) and mortgage-backed securities (MBS). Crowdfunding, however, is distinguished from these methods in its ability to provide direct exposure to real estate acquisitions and direct access to the acquiring entities.

Well, that is my take on real estate crowdfunding, please feel free to provide your prospective on the matter below.

Monday, July 23, 2018

Real Estate Asset Managers


In the real estate industry, there are many different professions, each with its unique role. I have focused on different real estate professions in the past on this site, so let us take a look at more obscure and lesser known profession--the Real Estate Asset Manager.

Role of a Real Estate Asset Manager

Although the title Asset Manager has multiple meanings in the world of finance, the Real Estate Asset Manager has a specific task—to manage properties resulting from mortgage default or property acquisition on behalf of a real estate investor, whole loan investor or mortgage servicer. Typically, real estate asset managers maintain a network of vendors, such as contractors, real estate brokers, real estate marketing companies and appraisers in order to maintain, market and sell properties under their management. Resultantly, much of the role of the Real Estate Asset Manager consists of vendor management.

Most real estate asset managers work with mortgage servicers through either a client or a subsidiary relationship. For example, Altisource, the nation’s largest real estate asset manager, is an independent but related company to Ocwen Loan Servicing, one of the nation's largest mortgage servicers, whereas SingleSource, another well-known real estate asset manager, is a wholly independent company that is hired by some of the largest loan servicers. Given the size of the whole loan portfolios of the larger mortgage servicers, many find hiring a real estate asset manager more cost effective than building and managing property vendor networks and tracking sales activity.

Local Impact of the Real Estate Asset Manager

Real estate asset managers also frequently serve as a clearinghouse for contract work for local real estate professionals. Many realtors, contractors, landscapers and appraisers use their affiliations with these asset management companies to gain access to a steady stream of contract work flowing from the real estate needs of mortgage servicers. These real estate professionals not only benefit from the attending to the substantial real estate management needs of the larger mortgage servicers, but also the flexibility of the relationship between the professional and the real estate manager involved. Typically a local real estate professional's obligation to the real estate asset manager can be terminated at any time after the accepted task has been completed.

Most often overlooked in most discussions concerning the real estate industry, the Real Estate Asset Manager serves a vital function in both the residential and commercial real estate markets. These managers of real estate facilitate market functionality and link real estate institutions with local markets.

That is my take on real estate asset managers, please feel free to provide your prospective on the matter below. 

Thursday, February 23, 2017

Property Maintenance Laws and Lending


The fight against property blight is a battle that has been waged for many decades. Some areas of the nation, have struggled with abandoned properties and even abandoned neighborhoods since the shrinking of the nation’s industrial sector beginning in the 1970’s. Other areas became intimately acquainted with blight as a result of the wave of foreclosures that took place at the end of the first decade of the century. However it may have arrived, the real estate finance market is certainly now affected by the palpable concern of property blight and has had to adjust to attempts to mitigate its damaging effects. 

Why Worry About Blight?

To be clear, blight is a real issue that can lead to a number of undesirable effects. Abandoned properties that are poorly maintained cause safety issues. Poorly maintained building systems and structure will eventually fail at some point, causing unsafe buildings. Overgrown landscaping leads to health concerns. These health and safety concerns become a problem for neighboring properties, as neighbors must then focus on how to curb the spread of these issues onto their properties. More generally, well-maintained properties inspire a pride of ownership that carries over to neighboring property owners. The opposite is also true—abandoned and poorly maintained properties drain the neighborhood of pride of ownership and lead to less diligent maintenance throughout the neighborhood.

Sunday, January 22, 2017

In the Weeds: How a Multidisciplinary Approach to Real Estate Can Lead to Increased Success

I once had a conversation with a coworker in which I expressed my frustration regarding the siloed view of real estate that many real estate professionals seem to employ as a matter of course. I complained that so few real estate professionals truly attempted to view real estate as a multifaceted asset and instead cared only to focus on their specialization within the industry. I wondered out loud how productive the industry could truly be if, in addition to their own professional perspectives, appraisers attempted to see the industry a little more like attorneys and attorneys tried to orient themselves to view the market like investors and investors like Relators, etc. 

My coworker listened politely until I was finished and wisely stated that the reason such cross-pollination of perspectives was not present in the real estate industry was that everyone was too “in the weeds” in their various roles and on their various projects to even attempt to take such a view. It was at that moment that I realized that I realized that my coworker had accurately described a condition that plagues much of the real estate industry—myopia. Indeed, many real estate professionals become so great at their specialization that cannot see the forest for trees or better yet, the weeds. 

Monday, January 9, 2017

Cooperatives

Welcome to another year at the Real Estate Think Tank. I enjoy writing about real estate and am thankful that I have this forum to share my thoughts on the subject. With that said, let’s get into Cooperatives.

A Cooperative, also known as a Real Estate Cooperative or Co-op, is a form of real estate ownership in which owners purchase shares in a corporate entity that owns a building. This entity is usually called an Apartment Corporation. Despite the name “Apartment Corporation,” a co-op can be both residential and commercial. Although residential co-ops, known as Housing Cooperatives, are more prevalent, commercial co-ops are not uncommon. 

In exchange for the purchase of shares in a co-op, each owner is given both an ownership interest in the Apartment Corporation, usually in the form of shares of stock, and a proprietary lease. The proprietary lease entitles each owner to occupy a certain portion of the building exclusively and confers most, if not all, of the rights of property ownership over the designated space, called an apartment.


Since the Apartment Corporation owns the building and not the owners, owners in a co-op are referred to as shareholders. Furthermore, shareholders do not technically own real estate or real property, but instead own shares, which are considered personal property. This distinction has certain legal ramifications that are noteworthy, but beyond the scope of this post. The ownership characteristics of a co-op, however, are also very interesting.

Monday, December 26, 2016

Condominiums

Condominium ownership is a form of real estate ownership that has unique characteristics. For those not well-versed in condominiums, here is a quick overview of their definition and purpose:

A condominium or condo allows a property, typically a multistory building, but not infrequently a large parcel of land, to be split into sections and owned by multiple owners. The unique aspect of condominium ownership is that it entitles an owner to ownership of a specific portion of a property and the space or “air” bounded by that portion. For example, through condominium ownership, one can convey the first floor of a three story building to one party, the second to another party and the third to yet another party. Interestingly, the units are frequently not required to be the same size, so one could create a two-unit condominium out of a three story building and convey the first floor to one party and the second and third floors to another party. A condominium is formed by recording a document, typically called a declaration in most jurisdictions, but also referred to by other names, such as a master deed, against the property. This document informs the public that the property is now a condominium, outlines the sizes of the units and common areas and provides other relevant information about the condominium.  Once a condominium is formed the property can no longer be sold as an undivided whole, unless the condominium regime is abandoned. The condominium regime will remain in effect until either the unit owners decide to abandon the condominium, the government dissolves the condominium, the property somehow loses the condominium status through the violation of local laws or the government condemns the property.