Real estate investors encounter various property management challenges including the extinguishing of third party property interests. Listed are 5 common situations that can expose investors to legal liability.

1. DON’T BE THE “TEST CASE”
5 Tips For New Real Estate
Investors For Severing
Property Interests
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2. With the steady influx of
property investors seeking
to stake their claim in the
phoenix that is Detroit,
comes various investment
property management
challenges.
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3. Listed here are 5
common problems
that new real estate
entrepreneurs face
when moving to
sever the property
rights of a
delinquent property
owner or tenant:
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4. I. THE TENANT OR OCCUPANT
WON’T LEAVE.
Avoid ‘self- help.’ Landlord ‘self-help’ for
locking out an occupant is, with rare
exception, illegal and has serious financial
and legal consequences. The same is true
for investors who seek to extinguish a
mortgage or land contract.
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5. An eviction action is required when the
former homeowner or perhaps even
their tenant, remains in the property
after the foreclosure redemption
expires. The mere fact that the
redemption period has expired does
NOT give the lender rights to enter the
property.
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6. Shutting off utilities or changing
door locks is considered ‘self
help” and can expose an investor
to liability in actions of trespass,
property damage, and even
emotional distress.
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7. SOLUTION: Legally sever the
possessory interest by filing an action
for eviction and secure a judgement and
writ for eviction. I know of several
cases where an investor is ready to
close on the sale of their property, only
to be sued by a former owner or tenant
whose legal interest in the property had
not been properly extinguished.
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8. II. THE FORMER PROPERTY OWNER
OR OCCUPANT FILES BANKRUPTCY
Equally as serious as landlord ‘self help’ is
when a creditor violates an automatic stay
after the tenant or homeowner files
bankruptcy. An automatic stay halts all
collection activities and this includes eviction
and foreclosure actions. The ‘stay’ has to be
lifted by a federal court order.
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9. Creditors, such as landlords and
mortgagees, who knowingly violate a
bankruptcy stay face severe fines,
sanctions, and attorney fees. They may
even have to pay damages.
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10. SOLUTION: Once notified of an
occupant’s bankruptcy, stop any
and all collection efforts until
you have a signed order “lifting
the stay”. When in doubt,
consult with legal counsel.
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11. III. FAILING TO UNDERSTAND
CHOICES OF RIGHTS AND
REMEDIES
Investors, particularly those who purchase out of
state properties, should know what type of
property interest they hold and the legal rights
that the interest affords.
In Michigan, mortgage holders do not have a fee
simple interest in a property, only a lien interest.
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12. So when a former property owner
abandons the collateral, an investor
cannot legally sell the home until they
foreclose out the homeowner’s interest or
unless they obtain a Deed in Lieu of
foreclosure.
More importantly, investors need to know
which legal process to use in order to
accomplish a specific goal.
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13. SOLUTION: Investors should consult
with a real estate attorney licensed
in the state where they plan to
invest and clarify their legal rights
before they engage in purchasing
investment properties or pursuing
legal action.
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14. IV. PROPERTY TAX
FORECLOSURE
It is not uncommon for investors to run up
against property tax foreclosure deadlines as
delinquent taxes are an inherent part of
purchasing distressed properties.
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15. Until proper due diligence is performed, it
makes little economic sense to initiate any
legal actions for foreclosure, eviction or
forfeiture, if the property would only be lost
to tax sale before an investor’s legal action
is completed.
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16. SOLUTION: Perform a title
search and make arrangements
to pay the taxes before initiating
legal action.
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17. V. DEEDS IN LIEU OF
FORECLOSURE
A Deed in Lieu of Foreclosure (“DIL”) is a deed
executed by the homeowner that satisfies a
loan in default in exchange for the mortgage
holder to forgo the foreclosure process.
However, taking a DIL without performing a
title search or without drafting the proper
supporting documents is rife with problems.
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18. A DIL is similar to quitclaim deed in that the
mortgagee takes title to the property with all
liens, encumbrances and assessments that
the former property owner incurred on the
property. Sometimes the amount of liens are
so excessive that it makes more sense for the
investor to foreclose on the property and
pursue a deficiency action against the former
property owner.
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19. Second, specific legal provisions are
required in the DIL documents, without
which, an investor can experience
difficulties foreclosing out subordinate lien
interests or in obtaining title insurance for a
later sale of the property.
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20. SOLUTION: Perform a title
search and if you plan to take a
DIL, don’t do so without having
a qualified attorney first prepare
DIL documents.
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21. VI. BOILERPLATE OR SELF-
GENERATED DOCUMENTS
There is an old adage that ‘ a contract is valid
until someone legally challenges it.’ Property
investors are often surprised to learn that their
self-prepared documents may actually violate
federal or state laws. Unfortunately they only
discover this at court placing their own legal
interests in jeopardy.
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22. Indiscriminately using online or “boilerplate”
forms to prepare a land contract, private
mortgage, or lease back can be legally hazardous.
For instance, selling back a property to a former
homeowner raises federal compliance issues
under RESPA (Real Estate Settlement Procedures
Act) and leasing back a property to a former
homeowner creates a landlord / tenant
relationship that ironically requires the investor to
obtain a certificate of occupancy and make city
required repairs on the former homeowner’s home.
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23. SOLUTION: Rely on an experienced
real estate lawyer to review and
draft the state- specific contracts
that will be used in property
transactions. It will reduce future
legal headaches, losses, and
uncertainties.
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24. CONCLUSION: Don’t be
the ‘Test Case.” When
in doubt of how to
legally proceed with
severing a former
property owner’s rights,
it is best for the new
real estate investor to
seek out an experienced
real estate lawyer.
● Land Contracts
● Investment Properties
● Real Estate
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25. Since 1990, attorney David Soble has represented
lenders, loan servicers, consumers and business
owners in real estate, finance and compliance matters.
For over 25 years, he has been involved in thousands
of real estate transactions and has successfully
negotiated and saved millions for his business and
consumer clients.
ABOUT THE AUTHOR
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31800 Northwestern Hwy.
Suite 350
Farmington Hills, MI 48334
Phone: (888) 789-1715
Disclaimer: You should not rely or act upon the contents of this article without seeking advice from your own, qualified attorney.