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Other issues arise even if foreclosure has been started ; one lender tells the story of how the borrower stopped making payments to both the 1st and 2nd mortgage . This particular lender was one of many in the 2nd mortgage . The 1st started the foreclosure process . Nobody in the 2nd mortgage wanted to cure the 1st . There was an offer by an independent 3rd party to purchase the property for the $ 100,000 over the1st mortgage , which would have been given to the 2nd [ which would have paid its loan down but not off ]. There were 25 beneficiaries on the 2nd DOT . Twentyfour of them chose to allow the sale and take the $ 100,000 , which would have amounted to a short sale ; however , the one lone holdout , who represented only 4 % of the 2nd , refused to sign off on the sale . His reasoning ? He stated that he believed that , at the foreclosure sale , someone would bid the property up more than $ 100,000 over the 1st . Not only was this illogical [ based upon the value of the property ], but it went against his previously signed documents stating that he would go along with the majority , opening himself up to a
lawsuit by the other lenders . The title company refused to give title insurance to the potential buyer , and the sale never went through . At the trustee sale , one bidder bid just over the 1st ’ s credit bid , and the 2nd walked away with zero .
Many individual trust deed investors believe they are protected from many perils if they own over 50 % of the note , as most states have a rule that the majority holder makes the rules ; however , title companies are not bound by such laws . If they refuse to give title insurance , any prudent wouldbe buyer of the property will walk away .
Another issue is that an investor in a note does not have to come up with his fair share of the money it takes to file foreclosure , and there is no provision that states that other investors who come up with more money get a preference , so it is difficult to maneuver a foreclosure unless each person comes up with his percentage required .
Other not infrequent situations come up where the borrower wants to do a loan workout or rewrite the note . Unless all parties agree , everything is at a standstill . Some unethical fractionalize note holders will sometimes hold this over on the rest of the note holders by demanding a larger share than they are entitled to or demand that the other investors buy them out .
For these reasons , many investors have turned to Funds where the Fund manager handles the foreclosure paperwork , pays the fees , and sees the entire process through .
The takeaway here is that one needs to be extremely careful if one wants to invest in a fractionalized note – not only do you want to own more than 50 % of the note , but make sure you know every other owner and have like minds , which , in today ’ s world , is more than a daunting task .
MEET EDWARD BROWN
Edward Brown currently hosts two radio shows , The Best of Investing and Sports Econ 101 . He is also in the Investor Relations department for Pacific Private Money , a private real estate lending company . Edward has published many articles in various financial magazines as well as been an expert on CNN , in addition to appearing as an expert witness and consultant in cases involving investments and analysis of financial statements and tax returns
Edward Brown , Host The Best of Investing on KDOW AM1220 on Saturdays at noon 21 Pepper Way San Rafael , CA 94901
ebrown1111 @ aol . com
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