There has been an increasing trend by Lenders disposing of distressed loans to sell the note secured by real estate rather than foreclose on the loans or allow a short sale. These notes are being offered and sold as “hard money” assets with the primary sales feature being the value or desirability of the underlying real estate collateral. Thus, many of these note transactions are being marketed, sold and documented as garden variety real estate transactions.
Buyers, brokers and sellers who treat note transactions like a real estate transaction are taking substantial risk. A promissory note is not real estate. The offer and sale of notes is subject to laws and regulations different and/or in addition to real estate laws and regulations.
A buyer’s primary concern in a note transaction should be ensuring the establishment of facts and documentation to evidence buyer is a “Holder in Due Course” under the Uniform Commercial Code. If a buyer does not achieve this status, buyer takes the note subject to all of the defenses the borrower may have against the original lender, e.g., truth in lending violations, lender liability claims, etc. Of equal concern is ensuring buyer obtains a lender’s policy of title insurance or an endorsement of the original lender’s policy to insure the position of the deed of trust or similar security instrument. Buyers should keep in mind that there may be no meaningful remedy against a note seller who is taken over by the FDIC.
Brokers should be concerned about licensing issues. A person brokering a note sale may be subject to mortgage broker or securities licensing under state and federal law. Failure to adhere to licensing requirements may result in the loss of the commission or worse, e.g., rescission rights of the buyer or regulatory enforcement actions.
Sellers should also be concerned about regulatory issues and should assure that full disclosure of all material facts concerning any real estate note offered for sale is made to all prospective buyers. Under certain circumstances, the securities anti-fraud statutes may apply and sellers could be liable for common law claims ranging from negligent misrepresentation to fraud.
There are an array of other issues which are raised by real estate note transactions. If you have questions regarding real estate note transactions, please contact Titus Brueckner & Levine PLC at 480‑483-9600 or jtitus@tbl-law.com.
