Although you can generally find out what your liability and tax consequences might be for walking away from your mortgage by contacting a real estate attorney and CPA, it is difficult to know what future effects the strategic default will have.  Specifically, will a homeowner be able to purchase a property again, and when. 

FannieMae has released two underwriting guidelines recently describing what waiting periods must be in effect after preforeclosure events, like short sales, a deed-in-lieu of foreclosure, or a foreclosure.  FannieMae has now altered their policy to encourage borrowers to work with their mortgage servicer to avoid foreclosure, and has instituted guidelines on how long Fannie Mae will wait before they might lend to a borrower who has a “credit event” like a foreclosure on their record.   FannieMae is encouraging borrowers to attempt modifications by communicating with their lenders.  Borrowers who have extenuating circumstances, and those who communicate with their lenders to work towards a modification solution, may be able to qualify for a FannieMae backed mortgage in as little as three years.  Borrowers who don’t will be penalized, as the current five year waiting period requirement has been increased to up to seven years. 

 Interestingly enough, FannieMae is also encouraging servicers to provide recommendations in the future on whether the borrower is a “strategic defaulter” and whether the borrower is a good candidate for a deficiency judgment. 

 A deficiency judgment is a judgment secured at the conclusion of a foreclosure lawsuit by your lender, for the difference between the mortgage and the amount received at the foreclosure sale.  The lender must file a lawsuit against you, where you receive notice and have the right to defend yourself.  If you do nothing, the lender will automatically receive a judgment.  If you are sued by your lender, it is important to contact a real estate attorney who can advise on whether the lender had the right to sue, and whether there are any statutory protections in place that you can use as a defense.  An attorney can also help you negotiate a settlement if you do not have a legal defense.

Many real estate investors are taking advantage of great deals in the housing market when a property is being sold at a trustee sale. Unfortunately, some of these investors are unknowingly buying more than just a house at a great price; they might be buying a lawsuit.

What happens when the former owner refuses to vacate the property after you purchase it at a foreclosure or trustee sale? In California, you are not allowed to do any “self-help”, meaning, you’re not allowed to do something like change the locks, cut off the power, or cut off the electricity to the property to force somebody out of the house.

You must take appropriate legal action to remove a former owner or tenant from the premises.

1. Provide the proper written notice for the person to vacate the premises. If it’s the former owner, a three day notice is appropriate. If it’s a tenant of the former owner, you must determine whether they stay in the property on a month-to-month basis or if they have a lease.

2. If the tenant refuses to vacate after the notice period is up, you must file an unlawful detainer action in the superior court of the county your property is located in. There are strict technical rules to follow when filing and serving the lawsuit. You must ensure you follow the appropriate service and notice periods in order to succeed.

3. The unlawful detainer action is an expedited proceeding. This means the defendant will have approximately five days to respond to your complaint. If they don’t, you can request a default judgment taken against them in order to remove them from the property. If they do answer, you should request a trial date and work on gathering evidence for the trial by requesting documents and sending discovery requests for anything you need to prove as part of your case.

4. The tenant is not allowed to file a cross-complaint, but they may say you have done something badly as an affirmative defense. If the tenant says there was a problem with the foreclosure itself, that is a case against the foreclosing lender, not you. Unfortunately, it is up to you to show this to the judge. If the tenant has filed for bankruptcy, that will generally just delay things, but not stop the eviction itself. If your unlawful detainer action is against the former owner, they do not have a legal right to remain in the property.

5. After you prove your case at trial, the tenant will have a number of days to vacate the property. If they still refuse to do so, you may now have the sheriff assist you based on the information in the “judgment for possession” that you should have received at your trial.

The good news about unlawful detainer actions is that they are very quick. From start to finish, it generally will take about 30 days for a standard unlawful detainer action. A regular civil action, like a quiet title action or an action for ejectment can take up to a year or more.

If it is the former owner who resides in the property and refuses to leave, you need to only provide a 3-day notice to quit. If they do not leave at the end of the 3-days, you may serve them with an unlawful detainer action.

If the tenant refuses to pay you any rent, you may serve them with a 3-day notice to pay or quit. If the tenant does not provide you with the rental balance by the end of the 3-day timeframe, you can initiate an unlawful detainer action in order to evict them.

The unlawful detainer action that may be initiated at the end of the 3- or 90-day term is a limited jurisdiction action in the superior court of your county. Your complaint requests the court enter a judgment in your favor for immediate possession and any back rent you may be due. If the lease provides for it, you may also request attorney’s fees as part of your damages.

There are strict technical rules to comply with when initiating an unlawful detainer action. Violation of them may force the judge to rule that you start the notice process all over again. Ensure careful compliance with the requirements, or contact an attorney who can guide you through the process.

First, ensure your mortgage contains a non-recourse clause. This provision keeps the personal property of each group member from being at risk in the event of a default. The lenders recourse is limited to foreclosure and acquisition of the property. This means your personal property, other real property, and income are out of the lender’s reach.

Second, ensure you have a clear agreement between the parties on how you will split mortgage payments, property taxes, insurance and maintenance on the property. Include dates to comply with things like maintenance, and the possibility that unexpected repairs may need to be made.

Third, agree on how and when you will sell the property, including the possibility of a loss and how the loss will be apportioned. Although real estate investment is historically sound as a long term investment, short term real estate investors have faced problems in our current economy.

Fourth, consider setting up an entity such as a limited liability company for holding the real property. This will provide further liability protection and provide a clear way to spell out the parties responsibilities in the investment.

Lastly, make sure you do your due diligence in deciding who your investment partners will be. Many friendships and families have been in turmoil because of the financial issues surrounding a real estate investment. Understand your intentions, your exit strategy and your responsibilities before you make a decision.

Unfortunately, unexpected repercussions for this type of situation are very common right now. Many people had a third party qualify for a purchase loan on their behalf in order to “buy” a property for their benefit. Since property values have gone done, the friend with the good credit is now on the hook for this loan because it can be near impossible to receive a loan to purchase the property from them. Even worse, many times, the “friend” stops making payments because the property value has dropped, or because they’re having financial problems themselves. There are a few different options in this situation:

1. Draw up an agreement between yourself and your friend indicating how and who will make mortgage payments. You don’t want your credit affected anymore than it has been. You want to allocate who will receive what percentage of any increase in value, and who will be responsible for a potential loss as well.

2. Agree to sell the property now and determine who will end up paying a deficiency judgment if there is one and/or who will pay any potential tax consequences for a short sale, if the property has lost value.

3. Make sure that title is held the way you want; you want the loan holder on title for their protection if you’ve altered that since loan origination.

For a complicated real estate situation such as this one, contact a real estate attorney to go over the points that should be included in the contract. You may realize that if that happened in the first place, you wouldn’t have to deal with this unfortunate situation and circumstance now.

Today, as the market value for many properties has fallen, there often isn’t enough money “left over” to pay your HOA. Most associations have governing documents that allow them to collect from a property owner personally, after the home has been lost to a foreclosure.

Bottom line – don’t just ignore your association fees because you’re in active foreclosure. You could pay for it later.

If your neighbor has been using your property and there is no recorded easement, it is called a prescriptive easement. This means that your neighbor’s use of your property is without your permission. In California, in order to acquire legal title to the property, the neighbor would have to not only use that portion of the property for five years, but also pay property taxes on this portion of the property. However, you must be careful if you wish to just block their access by putting up a fence.

Assuming your neighbor is using part of your property without your permission, you should assert your rights. Before you do so, it is important to review your deed to determine what rights they may have, and than review the circumstances regarding the use. If you would like to discuss whether an easement has been created by your neighbors’ use, contact attorney Elena Rivkin Franz at (408) 369-0800.

In the event you’re ready to take the plunge, consider an agreement to document who is responsible for what and what you’ll do with the house if you split up.  Important things to consider are who will pay for things like the mortgage, property taxes, insurance and maintenance.  More importantly, you should consider how you can realistically afford to sell or maintain the property in the event you do split up.   Allowing for concrete time frames to secure new financing and allocating responsibility for who will take care of the payments when the house is still in both your names are the big issues.

If you’re looking to make a big purchase like this with someone, consider drafting an agreement to protect yourselves now and down the line.

 Why go to all this effort?

You’re opening your business with plans of success, knowing you will be investing yourself, your time, and your effort into growing your business. Generally, you won’t be notified of any disputes related to your name until your business has grown and become successful, after you have spent time and energy getting your name known. Don’t lose this valuable piece of your business when it really means something to you because you didn’t research whether you could use it at the beginning. Trademark litigation is costly; a search determining whether you name will be rightfully yours is not.

 1. Type and Scope of Your Business

 The type and scope of your business will normally define how much work needs to be put into research surrounding your proposed business name. For example, if your new business is going to be the local diner branding your name, with no plans to expand outside your neighborhood, that should justify sticking to just your city and county. If you’re planning on selling party supply goods through a mail-order or internet catalogue, that may call for a full scale search of local and national usage since you’re be selling nationally.

At a minimum, your search should include every county in which you plan to do business. At the other end, your search may end up involving a complex multi-jurisdictional search of other business names in various jurisdictions of trademarked or protected intellectual property interests.

 2. Fictitious Business Names Registries

If your business is going to be a local one, check the fictitious business name registry with the county clerk for each county your business is likely to do business in. This includes counties you may expand to if your business will be a success. I do not know of any integrated database that has listings of fictitious business names for every county; a search must be done on a county-by-county basis.

 3. Business Name Search with the Secretary of State

The California Secretary of State maintains a listing of certain business names. You can check their website with their search function to see if there is already a corporation, limited liability company, limited partnership or limited liability partnership with a name that is confusingly similar to what you are hoping to use. Picking a name that is confusingly similar to another registered name may lead to a protracted tradename dispute down the line.

 4. Federal and State Registrations

Filing a fictitious business name required by California Business & Professions Code Section 17910 establishes a rebuttable presumption that the registrant has the exclusive right to use that name as a trade name in the county where the statement was filed.

What happens when there are two of you using a similar name? If you have a fictitious business name registration (a “dba”) and there is a corporation or limited liability company in the same county with a name similar to yours, whichever one filed first and is actually engaged in a trade or business using the name is entitled to the presumption of priority against the other.

 5. Specific Entity Name Requirements

 If I’m not a corporation, can I put an “Inc.” or “Incorporation” or “Corp.” or “Corporation” after my name?

 No. You’re not allowed to use a name that may be confusing to the general public.

 What about “LLC” or “Limited Liability Company” for my sole proprietorship?

 No. Only a limited liability company can use “LLC” or “Limited Liability Company” or “L.L.C.”

 You’re not allowed to pick a name for your business that will end up confusing people who look at your business name.

6. Reserve Your Business Name if There Will be a Delay in Filing Your Formation Documents

Reserving your name with the Secretary of State is a simple and inexpensive matter. Ideally, when you decide on a name after conducting the research I’ve described above, you should go through the effort of reserving with the Secretary of State. If you anticipate doing business in states other than California, reserve your name there as well.  The Secretary of State will issue a certificate of reservation which should provide sufficient time to finish your business formation.

 7. Will a Fictitious Business Name Statement Be Required?

A fictitious business name statement must be filed with the county clerk if you are regularly doing business under a fictitious business name (or a “dba”). You can file a fictitious business name statement in the county that your business has its principal place of business, within 40 days of the date you first began conducting business under that name. You may also wish to file a fictitious business name statement in other counties where you will transact business now and in the future.  Once you filed the fictitious business name statement with the county clerk, you must publish the name with a newspaper in the same county within 30 days of filing the statement, once a week for 4 consecutive weeks, with five days between each date of publication. Most metropolitan areas have papers that do this for a nominal sum. Afterwards, you must file an affidavit of publication with the county clerk within 30 days after completing your publication run. A fictitious business name statement will expire five years after the date you first filed it in the county recorder’s office, at which point you’ll need to refile.

*Annual statement of information (officers, directors, and agent for service of process) and filing fee to the secretary of state (except sole proprietors and general partnerships).

*Taxes – annual franchise tax fee (except sole proprietor and general partnership), state and federal tax returns, employment taxes, sales and use taxes, personal property taxes.

*Local business license, professional licensing

*Federal Employment Identification Number

*Insurance – unemployment and workers’ compensation, liability, etc.

*Qualification to do business in other states if you do business elsewhere.

How to avoid personal liability?

1. Form an entity.
2. Avoid personal guarantees.
3. Observe appropriate formalities for the entity.
4. Remit all taxes withheld or collected.
5. Carry insurance.

Protecting Intellectual Property

1. Identify trade secrets and take steps to protect them.
   1. Trade secret defined as “(1) Derives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use; and (2) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. 
2. Identify and protect creative works through copyrights.
3. Identify and protect distinctive phrases, logos and branding items through trademarks (or service marks). 

Buy-Sell Agreements

An agreement document how you or another owner can leave the business if one of you moves out state, goes to a new line of work, becomes physically or mentally disabled, dies, wants to sell to an outsider, or seeks to buy out a co-owner’s interest. 

What can happen if you don’t have a buy-sell agreement?

            *You may be forced to work with and share control of the company with someone you don’t know.

            *You may end up working with a family member of a deceased or divorced owner.

            *If you die, your survivors may end up stuck in a business they don’t want.

            *You may end up arguing with a co-owner on the price of the company.

Business Contracts

What makes a valid contract? An agreement, consideration and acceptance, and sometimes a writing.

Things to include in the contract:

            *Names and addresses of the parties

            *Date the contract is signed

            *Short preamble, i.e. background or recitals

            *What each party promises to do

            *When the work will be done or the product delivered

            *How long the contract will remain in effect

            *The price – or how it will be determined

            *When payment is due

            *Warranties

            *Conditions on how you can terminate the agreement

            *Liquidated damages if performance is delayed or defective

            *Whether or not a party can transfer their interest in the contract to another

            *Resolution of disputes through arbitration or mediation

            *Who will cover attorney’s fees and costs if a party breaches

            *Where notices of default and other communications can be sent

            *What state law applies if questions about the contract arise. 

Choosing an entity

Do the parties need limited liability?

Do the parties want profits and losses to pass through to their personal income tax returns?

Will all of the parties be actively involved in management?