Trends

Transactions involving failed banks require extra attention

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Dirt lawyers: call your friendly, intelligent title insurance underwriter!

Unfortunately, failed banks are back in the news and again affecting the stock market and our 401(k) accounts. It is doubtful that the California and New York banks that have failed have significant assets or loans in South Carolina, but Chicago Title’s underwriters have heard of at least one recent local transaction that involved one of the failed banks.

How should real estate lawyers protect their clients and themselves?

First, here’s a link provides general information about failed banks: http://www.fdic.gov/bank/individual/failed/index.html

Next, remember that assets are not automatically transferred by state law to an acquiring bank when the FDIC is appointed receiver and simultaneously announces the acquisition of the failed bank’s assets. Also, remember that the acquiring bank is not necessarily a “successor” to the failed bank.

Such an acquisition does generally mean that we can treat the acquiring bank as the owner of certain loans of the failed bank. We can generally rely on payoff statements, releases, satisfactions, and foreclosure actions by the acquiring bank if the acquiring bank asserts that it is the assignee by purchase. Documents should recite that the acquiring bank is the assignee of the loan. And we should be able to rely on that recitation.

In foreclosure situations, the acquiring bank may be required to prove its ownership of the debt and its record interest in the mortgage.

Payoff statements from the failed bank may be relied upon and the payoff statement may be made at the failed bank’s direction. But any release or satisfaction executed in response to that payoff must come from the receiver or its attorney in fact. Closing attorneys should confirm that the appropriate signature will be obtained before making the payoff.

The FDIC should sign recordable affidavits, as receiver, to the effect that it sold the particular loan asset to the acquiring bank to support assignments and modifications.

If your client purchases an REO asset that was owned by a failed bank, the proper grantor in the deed will be the FDIC, as receiver for the named failed bank. The FDIC will likely grant powers of attorney to individuals at the failed bank, at the acquiring bank, or internally, to facilitate signing these deeds. The power of attorney should comply with South Carolina law.

FDIC Statement of Policy on Foreclosure Consent and Redemption Rights provides that where the FDIC holds a junior mortgage, it “hereby grants its consent” to any foreclosure by a holder of a bona fide senior mortgage. Your title insurance company may require notice to the FDIC and the acquiring bank.

My best advice in all these cases is to call the person who either knows the answer to your many questions or will find out the answers to each of these questions for you: your favorite friendly and intelligent title insurance company underwriter!

Does real estate “wholesaling” work in our market?

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Maybe, but real estate practitioners should be careful!

A recent discussion on South Carolina Bar’s real estate section listserv surrounded whether and how to close “double closings” vs. “assignments of contracts”.  This is not a novel topic in our market. In the very hot market that preceded the crash beginning in 2007, one of the biggest traps for real estate attorneys was closing flip transactions. Title insurance lawyers fielded questions involving flips on an hourly basis!

Flips have never been illegal per se. Buying low and selling high or buying low and making substantial improvements before selling high are great ways to make substantial profits in real estate.  

Back in the day, we suggested that in situations where there were two contracts, the ultimate buyer and lender had to know the property was closing twice and the first closing had to stand on its own as to funding. In other words, the money from the second closing could not be used to fund the first closing. (Think: informed consent confirmed in writing!)

Where assignments of contracts were used, we suggested that the closing statements clearly reflect the cost and payee of the assignment.

The term real estate investors are using these days to define buying low and selling high is “wholesaling”.  A quick Google search reveals many sites defining and educating (for a price, of course) the process of wholesaling. This is a paraphrase of a telling quote I found from one site:

If you’re looking for a simple way to get started in real estate without a lot of money, real estate wholesaling could be a viable option. Real estate wholesaling involves finding discounted properties and putting the properties under contract for a third-party buyer. Before closing, the wholesaler sells their interest in the property to a real estate investor or cash buyer.

One of the smart lawyers on our listserv, Ladson H. Beach, Jr., suggested that there does not appear to be a consensus among practitioners about how to close these transactions. He suggested reviewing several ethics cases* that set out fact-specific scenarios that may result in ethical issues for closing attorneys.

In addition to the ethics issues, Mr. Beach suggested there may be a licensing issue where an assignor is not a licensed broker or agent. A newsletter from South Carolina Real Estate Commission dated May 2022 which you can read in its entirety here addresses this issue. The article, entitled “License Law Spotlight: Wholesaling and License Law” begins:

“The practice of individuals or companies entering into assignable contracts to purchase a home from an owner, then marketing the contract for the purchase of the home to the public has become a hot topic, nationwide in the real estate industry in recent years. This is usually referred to as ‘wholesaling’. The question is often, “is wholesaling legal?’ The answer depends upon the specific laws of the state in which the marketing is occurring. In South Carolina, the practice may require licensure and compliance with South Carolina’s real estate licensing law.”

The article suggests that the Real Estate Commission has interpreted that the advertising of real property belonging to another with the expectation of compensation falls under the statutory definition of “broker” in S.C. Code §40-57-30(3) and requires licensure. Further, the newsletter suggests S.C. Code §40-57-240(1) sets up an exception; licensing is not required if an unlicensed owner is selling that owner’s property. The Commission has interpreted, according to this article, that having an equitable interest is not equivalent to a legal interest for the purpose of licensing. In other words, a person having an equitable interest acquired by a contract is not the property’s owner and has no legal interest in the property for the purposes of this licensing exemption.

So real estate practitioners have several concerns about closing transactions of this type. Be very careful out there and consult your friendly title insurance underwriter and perhaps your friendly ethics lawyer if you have concerns as these situations arise in your practice.

*In re Barbare (2004), In re Fayssoux (2009), In re Brown (2004) and In re Newton (2007)

FinCEN warns that Russian bad actors seek to invest in U.S. commercial real estate

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Financial institutions have reporting obligations under the Bank Secrecy Act, and Financial Crimes Enforcement Network (FinCEN) published an alert on January 25 warning financial institutions to be alert to potential investments in commercial real estate by sanctioned Russian elites, oligarchs, their family members, and the entities through which they act.  Commercial real estate lawyers should also be alert to these dangers.

You can read the Alert in its entirety here.

Use this link for a list of sanctioned Russian elites and their proxies.

Commercial real estate transactions are particularly vulnerable to exploitation by bad actors because of the complex financing methods and opaque ownership vehicles routinely employed. Because commercial properties are so high in value, buyers and sellers seek to use these methods and vehicles to limit their legal, tax and financial liability. In addition, foreign investors are common in commercial real estate.

The Alert points to the following types of transactions and vehicles that are so common that protection against invasion into them by bad actors would be difficult at best. The green, italicized words are mine:

  • The use of pooled investment vehicles, including offshore funds, to avoid due diligence and beneficial ownership protocols established by financial institutions. In other words, a bad actor may attempt to reduce its ownership percentage in a property to avoid normal due diligence for owners with higher percentages.
  • The use of shell companies and trusts to conceal ownership interests.
  • Involvement of third parties to invest in behalf of a criminal or corrupt actor.
  • Inconspicuous investments that provide stable returns. The properties may not be high end. They may be multi-family housing, retail, office, industrial or hotels in small and mid-size urban areas.

Thankfully, FinCEN’s Alert provides several red flags to assist in these difficult determinations.

  • The use of a private investment vehicle that is based offshore to purchase commercial real estate and that includes politically exposed persons or other foreign nationals (particularly family members or close associates of sanctioned Russian elites and their proxies) as investors. I had to Google the term “politically exposed person”. It means a person who has been entrusted with a prominent public function. These individuals generally represent a higher risk for potential involvement in bribery and corruption by virtue of their positions and influence.
  • When asked questions about the ultimate beneficial owners or controllers of a legal entity or arrangement, customers decline to provide information. In my former life in which I represented developers, when I asked questions about the identity of the beneficial owners, I got answers. It is a red flag if you are unable to obtain those answers.
  • Multiple limited liability companies, corporations, partnerships, or trusts are involved in a transaction with ties to sanctioned Russian elites and their proxies, and the entities have slight name variations.
  • The use of legal entities or arrangements, such as trusts, to purchase commercial real estate that involves friends, associates, family members, or others with close connection to sanctioned Russian elites and their proxies.
  • Ownership of commercial real estate through legal entities in multiple jurisdictions (often involving a trust based outside the United States) without a clear business purpose. Again, if you can’t get good answers to your questions, this is a red flag.
  • Transfers of assets from a politically exposed person or Russian elite to a family member, business associate, or associated trust in close temporal proximity to a legal event such as an arrest or an OFAC designation of that person. Remember that we check the OFAC (Office of Foreign Assets Control) list for individuals in our transactions using links provided by title companies. If you have questions about how to perform this function, call your friendly title insurance company underwriter. You can use this link.
  • Implementation of legal instruments that are intended to transfer an interest in commercial real estate from a politically exposed person or Russian elite to a family member, business associate or associated trust following a legal event such as an arrest or an OFAC designation of that person.
  • Private investment funds or other companies that submit revised ownership disclosures to financial institutions showing sanctioned individuals or politically exposed persons that previously owned more than 50 percent of a fund changing their ownership to less than 50 percent.
  • There is a limited discernable business value in the investment, or the investment is outside of the client’s normal business operations.

This is the fourth FinCEN alert on potential Russian illicit activity since Russia’s invasion of Ukraine. The Federal government is serious about policing these activities. I recommend that you contact your favorite title insurance underwriter any time you determine that sanctioned persons or their proxies involved in your transactions. Be careful out there!

Texas Attorney General investigating Home Title Lock

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Several years ago, a prominent Myrtle Beach real estate lawyer called me to suggest that our (title insurance) company should develop a product like Home Title Lock. That company advertises that it alerts homeowners if fraudulent or forged deeds are recorded in their chains of title. I contacted corporate leaders to explore this idea, and it was quickly decided that the product was virtually meaningless.

Last week, another prominent Myrtle Beach-area lawyer emailed me with news that the Attorney General for Texas is investigating the company. Here the South Carolina dirt lawyer’s direct quote, “After the number of older clients I have had who come into a transaction confused and scared by the talking heads on conservative media who have been schilling for this company, I am glad to see law enforcement taking an interest.”

Ken Paxton, the Attorney General, apparently agrees. He issued a press release on January 24, stating, “I won’t tolerate false, misleading, or deceptive advertisements targeted to any Texas consumers—especially Texas seniors. If Home Title Lock is misrepresenting its services or the need for its services I will put a stop to its unlawful behavior.”

The AG announced an investigation of this company for potentially violating the Texas Deceptive Trade Practices Act by misleading consumers with deceptive statements concerning the prevalence of home title theft and the need for this company’s services.

The press release states that Home Title Lock is a California-based entity that claims to provide 24/7 monitoring of a consumer’s home title. (How could that even be done?) The press release states that the company has received scrutiny in recent months over questionable advertisements, including its claim that the FBI calls home title theft “one of the fastest growing white-collar cyber-crimes in America.” Apparently, Home Title Lock admits that it markets to “older customers.”                      

The Texas AG’s office issued a Civil Investigative Demand on December 15 ordering the company to make documents available substantiating the following, among other matters:

  • Any home title theft resolution services;
  • Representative samples of customer contracts;
  • The claim that the Company monitors the title of consumers 24/7;
  • The claim that the Company provides nationwide monitoring;
  • The claim that like other white-collar crimes, title fraud remains under reported with losses totaling more than $5 million in 2015;”
  • The claim that a victim is responsible for payments incurred due to a fraudulent home equity loan. (“Now thieves take out massive loans using your home’s equity-leaving you with the payments and mountains of legal bills;”) and
  • The claim that the company offers “complete protection – including up to $250,000 in legal fees and expense coverage.”

I’m so glad to see this investigation is starting, and I hope other states follow.

Will 2023 be a “normal” year in real estate?

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The “Greenville Business Magazine” published an article on January 27 that should interest all dirt lawyers. The article, written by David Caraviello, is entitled, “Leaving the Frenzy Behind: Could 2023 Be a More ‘Normal’ Year in South Carolina’s Real Estate Market?” You can read the article in its entirety here.

The article outlines the frenzy of the 2022 real estate market in South Carolina which culminated in an acute inventory shortage. While industry leaders budgeted for 2023, they wondered whether home prices would plummet because of rising interest rates. The national picture may be bleak because of these factors, but the article points out that experts do not foresee a gloom-and-doom scenario for South Carolina.

I’ve seen several news sources recently, including this one, pointing out that South Carolina is a primary destination for consumers looking for milder winters and following jobs at BMW, Volvo, and other companies. The market does not look dismal for us.

Please take a minute to read the article. To some real estate professionals, it says, the scenario entering 2023 sounds “refreshingly normal,” although we may have forgotten what normal is.

Perhaps 2023 will return to the ordinary seasonal ebbs and flows to which law firms can adapt from a staffing and other cost standpoint. Maybe everyone will be able to take a vacation this year. Let’s hope so! Good luck out there!

MV Realty sued by Florida Attorney General

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This blog has previously discussed MV Realty PBC, LLC. South Carolina title examiners report they are discovering “Homeowner Benefit Agreements” or “Exclusive Listing Agreements” filed in the public records as mortgages or memoranda of agreement. The duration of the agreements purport to be forty years, and quick search revealed hundreds of these unusual documents filed in several South Carolina counties. The documents indicate that they create liens against the real estate in question.

The company behind these documents is MV Realty PBC, LLC which appears to be doing business in the Palmetto State as MV Realty of South Carolina, LLC. The company’s website indicates the company will pay a homeowner between $300 and $5,000 in connection with its Homeowner Benefit Program. In return for the payment, the homeowner agrees to use the company’s services as listing agent if the decision is made to sell the property during the term of the agreement. The agreements typically provide that the homeowner may elect to pay an early termination fee to avoid listing the property in question with MV Realty.

In response to numerous underwriting questions on the topic, Chicago Title sent an underwriting memorandum to its agents entitled “Exclusive Listing Agreements”. Chicago Title’s position on the topic was set out in its memorandum as follows: “Pending further guidance, Chicago Title requires that you treat recordings of this kind like any other lien or mortgage. You should obtain a release or satisfaction of the recording as part of the closing or take an exception to the recorded document in your commitments and final policies.”

Googling MV Realty results in a great deal of information. Real estate lawyers should familiarize themselves with this company and its program to advise clients who may question whether the program makes sense from a financial and legal perspective.

In December, Florida’s Attorney General sued the company calling the venture a “deceptive scheme”. The lawsuit seeks an injunction, preventing enforcement of the contracts with consumers, preventing future deceptive and unfair trade practices, and returning funds to consumers.

News sources report that the company is active in 23 states, including South Carolina, and that Attorneys General in several other states are investigating the activities of this company. News sources also report numerous lawsuits against consumers seeking to enforce these contracts. U.S. Senator Sharrod Brown (D-Ohio) has indicated the company could face scrutiny from the Senate Committee on Banking, Housing and Urban Development.

Dirt lawyers, pay attention to this situation. We will certainly see updates.

Cybersecurity Breach affects SC county offices

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Chicago Title’s South Carolina state office sent out a memorandum on December 29 announcing that Cott Systems, Inc. has suffered a cybersecurity breach. I wanted to make sure the readers of this blog have access to this important information.

Cott Systems provides many services to county offices, including electronic recording, record storage, online searching, and court case management. Chicago Title has been told that Cott Systems provides services to at least the following counties: Darlington, Florence, Marlboro, Oconee, and Union. Other counties may be involved.

Apparently, this company took its services offline upon discovery of the breach. As of December 29, the company was unable to estimate when service may be restored but reported that it is working diligently to address the problem. As of mid-day on January 4, we were told that at least two counties were back online. I hope all of them are up and running at this point.  

If title abstracting and recording services are ever unavailable in the counties where you do business, please contact your title insurance company for assistance. Your friendly underwriters should be able to talk with you to resolve your issues, depending on the dates of your prior title work, dates of closings, etc.  Please be careful out there!

Fifth Circuit addresses short-term rental challenge

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This blog has previously discussed challenges by various cities, including cities in South Carolina, to short-term rentals in residential areas.

Vrbo and Airbnb are two go-to websites to find interesting short-term rentals in vacation locations. Sometimes a cabin or house seems much more appropriate and fun than a hotel room for a family get-away. Having a kitchen and room for dining is often a plus.

Arguments against such rentals often focus on noise and parking problems in otherwise quiet residential subdivisions.

Rules vary greatly in the cabins and houses we’ve rented, but a common theme seems to be that parties are not allowed. I’ve also seen limits on the number of cars that can be accommodated and, of course, the number of people permitted. Pets may or may not be allowed.

The Fifth Circuit Court of Appeals recently addressed such a challenge in Hignell-Stark v. City of New Orleans, 46 F. 4th 317 (August 22, 2022). Thanks to Professor Dale Whitman of the University of Missouri at Kansas City Law School via the Dirt Listserv for information on this case.

An ordinance in the City of New Orleans required an owner to be a resident of the city to obtain a license to become a landlord allowing short-term rentals. When the plaintiffs challenged this ordinance using a “takings” theory, the Fifth Circuit held that theory to be inapplicable because permission to make short-term rentals of a residential unit is not a property interest. It is instead, according to the Court, a privilege.

The plaintiffs also argued that the ordinance was an undue burden on interstate commerce, and the Court agreed, stating that an ordinance that discriminates against interstate commerce is per se invalid unless there are no available alternative methods for enforcing the city’s legitimate policy goals. The ordinance in question was a blanket prohibition against out-of-state property owners’ participation in the short-term rental market. The Court pointed out that the ordinance doesn’t just make it more difficult for non-residents to compete in the market for short-term rentals in residential neighborhoods; it forbids them from participating altogether.

The Court pointed to alternative methods for achieving the city’s legitimate goals of preventing nuisances, promoting affordable housing, and protecting neighborhoods’ residential character. More aggressive enforcement of nuisance laws, increased penalties for nuisance violations, increased taxes on short-term rentals, requiring an operator remain on the property during night hours, and capping the number of short-term rentals licenses in particular zoning district might be alternatives.

The ordinance was held unconstitutional and void because the city’s objectives could be addressed in other ways that did not burden interstate commerce.

What do you think? Would you be comfortable with short-term rentals in your neighborhood?

Fannie Mae will accept attorney opinion letters in lieu of title insurance

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Fannie Mae’s updated Selling Guide now allows attorney opinion letters in lieu of title insurance in some circumstances. This change aligns Fannie Mae with Freddie Mac’s similar announcement. Will the marketplace change dramatically because of these policy announcements. I hope not and I doubt it.

Fannie Mae touts its change as a method to reduce costs for borrowers. I don’t believe South Carolina lawyers will issue title opinions for residential loans that will be less expensive than title insurance. I know I wouldn’t.

The guidance indicates opinion letters will not be accepted where the loan is secured by a condominium, a leasehold estate, or a manufactured home.

According to the guidance, the attorney’s title opinion letter must:

  • be addressed to the lender and all successors in interest of the lender
  • be commonly accepted in the area where the subject property is located
  • provide gap coverage for the duration between the loan closing and recordation of the mortgage
  • list all other liens and state they are subordinate
  • state the title condition of the property is acceptable and the mortgage constitutes a lien of the required priority on a fee simple estate in the property

Do you see any problems with this list? I’ve never issued an opinion letter that provided gap coverage and I don’t recommend that you accept that risk in your transactions. What happens if you update title and discover a mechanic’s lien recorded in the gap? That lien would become your problem as the attorney who agreed to cover the gap as of the date of the opinion letter or the closing date.

Before the general use of title insurance, attorney’s routinely issued opinion letters to lenders and buyers. But title insurance has historically been determined to be the better choice.  Attorneys should not be responsible for title problems that cannot be discovered through a title examination.  A forgery in the chain of title, for example, would be covered by title insurance but should not be covered by an attorney’s opinion. The same may be true for missing heirs, matters that may be apparent from a visit to the property and survey matters.

But it concerns me that lenders who accept attorney’s opinions may perceive those items (and others) to be covered. To ensure your opinion letters are not perceived to cover matters outside the title examination, proper “exceptions” should be added to your letters. To protect you, your law firm and your malpractice carrier, your letters should contain many paragraphs of exceptions!

My best advice is to resist this proposed change in the marketplace. I believe title insurance provides the best coverage for owners and lenders, and it indirectly provides protection for closing attorneys. We can be encouraged that Freddie Mac’s similar announcement two years ago has not greatly impacted our industry. Let’s hope Fannie Mae’s announcement will have a similar reaction.

Columbia house purportedly sold as an NFT

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149 Cottage Lake Way – one of the first NFT-based residential home sales for the US

When bizarre topics are discussed in my family, we often employ the famous quote by actor Chris Tucker from the funny movie Rush Hour: “Do you understand the words that are coming out of my mouth?” I’m not sure I understand the words I am typing here, so we’ll add links below for you to read for yourself.

A company called Roofstock onChain claims to have sold a house located in Columbia, South Carolina using NFT technology. The address of the house is revealed: 149 Cottage Lake Way, and it’s located in my zip code. If you Google that address, you’ll see lots of pictures of the house and articles about this transaction.

I had to start with the basics to attempt to get a handle on this topic. An NFT is a non-fungible token, a digital asset that can come in the form of art, music, in-game items, videos, and other assets. They are bought and sold online using cryptocurrency. The NFT allows the buyer to own the original item. NFTs have been described as physical collector’s items, only digital. Instead of receiving an actual painting, the buyer gets a digital file that represents exclusive ownership.

To trade in NFTs, the buyer must first have a digital wallet that allows storage of cryptocurrency and NFTs. The wallet must be funded with cryptocurrency. After that step, there are apparently several NFT marketplaces to explore.

So how did this house purchase take place? An LLC was created for the ownership of the three-bedroom recently renovated home. (And here are the words that I don’t understand.) Several of the articles say something along the lines of: The house was sold on the Roofstock onChain NFT marketplace by transferring the home identity to an Ethereum address owned by the buyer.

Dirt lawyers, I ask you, do you see any problems with this transaction? Did anyone search the title? Was there a physical inspection of the home? Was there a survey? Were the taxes prorated?  Did a South Carolina licensed attorney close the transaction?  I have more questions, but I bet you can come up with a list of your own.

I’ll continue to read about this topic and attempt to keep readers informed. In the meantime, here are some links for your education:

The future is now? Columbia becomes blockchain testing ground with house bought as an NFT

Blockchain Makes Deeper Inroads Into Real Estate As Roofstock Announces Its First NFT Home Sale

Are NFTs the future of home ownership?

How NFTs Could Change Real Estate

Blockchain Facts: What it is, how it works, and how it can be used

Roofstock onChain – https://onchain.roofstock.com/

Welcome to Ethereum – https://ethereum.org/en/