Land Bank Playbook: Acquisition of Properties: Pipelines, Title, Practice

Land Bank Playbook Section XII

A. Acquisition Pipelines and Considerations

Property pipelines are necessarily based upon capacity, priorities and abilities to establish relationships with pipeline grantors. These priorities can be based on: 1.) the nature of grantor itself (i.e., tax foreclosure, Auditor’s Forfeiture list, housing courts, FNMA, HUD, REO); 2.) the activities of that grantor (flipping, auctions, etc.); 3.) unique market conditions; and/or, 4.) strategic single-purpose and targeted considerations. The use of the LRC as a “tool” for land assembly, land clearing, title cleansing, tax free land holding, etc. can be as surgical or broad as the community’s priorities and funding dictate.

B. Title Work, the “Schedule B” and Marketable Title

Regardless of property pipelines, priorities and capacities, acquiring and disposing of good “marketable title” is at the core of land banking. Full title commitments and title policies for this to assure marketable LRC title can get costly. How much money is spent on assuring title requires a brief discussion of the main acquisition pipelines.

a. Tax Foreclosure

Typically, properties acquired by the LRC from tax foreclosure result in clean titles. This is because the process with any foreclosure lawsuit is designed to accomplish this. This happens because of certain requirements in the foreclosure lawsuit the failure of which results in clouded titles.

Accordingly, by naming–and serving–as defendants all persons having any interest or lien of record on the property, they have legal notice and opportunity to assert any defenses or “redeem” the property by paying the taxes. If no defendant redeems, the property is foreclosed upon and disposed of free and clear of all such liens. If any one of the owners or lien holders, by error or design, are not named in the foreclosure lawsuit, a title cloud remains on the parcel as to such interest-holder. Such a property should never be acquired unless the cloud is first removed.

How does the Prosecutor (in the case of a tax foreclosure) or a bank (in the case of a private foreclosure) assure that all parties are named in his/her lawsuit? It is by virtue of a “schedule” in a title report called a “preliminary judicial report” which is filed with all foreclosure suits. It is essentially a title guaranty to the court guaranteeing the status of existing record title. This preliminary judicial report includes a “Schedule A” which generally describes the property and the current owners of record. A “Schedule B” lists all interest and lien holders on the title and is the source from which all of the aforesaid defendants get named in the lawsuit.

In a tax foreclosure case, because title clearance typically is eventually declared by a Court or BOR decree, it is not be necessary to spend large sums on title policies and lien searches to assure the LRC is receiving good “marketable title.” Perhaps initially, the LRC should order full title commitments for the first batch of prospective properties eligible for receipt from tax foreclosure. This would allow the LRC to make sure and test whether the foreclosure process, in fact, effectively follows the above process and that all Schedule B defendants are named in the Complaint. While there is every reason to believe the Prosecutor and Magistrates will foreclose properly, every pipeline, at least at first, should be tested to insure that the LRC receives good title.

b. Non-Tax Foreclosure Acquisitions

Titles from governmental or quasi governmental pipelines (HUD, Fannie Mae, Freddie Mac) should also initially be tested with full title commitments to insure clear and marketable title is conveyed to the LRC. These institutions acquired title themselves from the private foreclosures of their servicing financial institutions. As with tax foreclosures, this almost universally results in title cleansing. The same preliminary judicial report, Schedule B assures that title is cleansed for the same reasons as in tax foreclosure, i.e., naming and serving all parties listed on the Schedule B. Once tested with an initial batch of transfers, it is usually sufficient merely to do the less expensive lien searches to make sure that no liens have attached from the time that HUD or Fannie Mae acquired title, to the time the property transacts to the LRC.

c. Private Grantors and Deeds-in-Lieu

All transfers to the LRC from third parties should always be preceded with full title commitments and policies to assure the LRC receives marketable title. Prior to receiving title, the LRC should examine a current “Schedule B” issued from a title company which shows no liens or encumbrances. If it shows liens, the LRC should not acquire the parcel until they are removed. All purchase agreements should also have a contractual commitment from all grantors warranting marketable title.

d. Easements, Restrictions vs. Encroachments, Reverters, Deed Restrictions

Title defects and liens shouldn’t be confused with common easements and restrictions of record for such things as above or below-ground utilities and public rights of way. These are usually acceptable limitations to title. Over time, an experienced examiner will distinguish acceptable limitations from unacceptable things like reverters and deed restrictions.

Title reports rarely include or make reference to any unrecorded “encroachments” which are also unacceptable. An encroachment is where an adjacent garage, a fence, or some other use encroaches onto the property acquired or sold. This typically is discovered through a “location survey,” or a formal survey. The run-of-the-mill residential transactions from the aforesaid pipelines will not come with such surveys, nor are they typically necessary. However, encroachments are pointed out in this section to call attention to the possibility that an encroachment could result in significant liability if an adjacent owner demands that a garage on an adjacent LRC property be removed because it encroaches onto his/her property. As with all acquisitions, there is no shortcut to physically inspecting all acquisitions beforehand. Land bank staff and inspection vendors should be trained to keep an eye out for any obvious signs of encroachments.

C. Acquisition Contracts and Due Diligence Efforts

a. Inspections

Some level of pre-acquisition due diligence is required for all acquisitions even if the intended disposition is demolition. This diligence is in addition to the title due diligence discussed above.

Prior to acquisition, there is no shortcut to a physical on-site property inspection. Staff or hired inspection vendors should look at the house from many perspectives. Is the home vacant? Are there squatters? Does the home have a realty “For Sale” sign. In the case of tax foreclosed vacant and abandoned property, there is typically no opportunity to observe the interior of a home unless, of course, the home is open and unsecured. Exterior inspections should still occur with pending tax foreclosures.

Properties acquired from third parties (Fannie Mae, HUD, housing court, REO’s), permit pre-acquisition LRC access to homes to determine interior and exterior physical conditions. A property inspection form should be filled out and used to populate the LRC’s internal PPS. The form should identify key exterior conditions, occupancy, and primary interior conditions (mechanical, electrical, plumbing, roof, foundation, basement, etc.). This allows the LRC staff to track the general trajectory of the property (rehab, hold, demolition) once entered into the LRC PPS.

Lastly, pre-acquisition due diligence includes a very general market value search. Even if a property has good “bones” on it, poor market conditions may still require demolition. Absent a qualified investor/rehabber in such situation, it is very costly to hold such a property indefinitely. Market determinations can be discerned through staff institutional knowledge about neighborhood conditions, the auditor’s appraisal, services such as Zillo (which admittedly are not always reliable) and real estate “broker price opinions” are helpful.

b. Contracts

Acquisition and disposition legal forms are as numerous as there are attorneys who draft them. Although unique contracts for unique transactional situations will always occur, certain things can be dealt with uniformly if possible. Transaction fees and proration of taxes in non-tax foreclosure cases, escrow and title insurance costs, marketable title, should always be agreed to in advance.

For the LRC’s routine transactions, simplicity is better. For deeds-in-lieu of foreclosure under Chapter 5722 of the Revised Code, a simple one or two page agreement tracking the statutory prerequisites followed by simple conveyance language is suitable. Similarly, acquisitions of donated distressed properties from a bank REO with which the LRC has an ongoing relationship or protocol can utilize a similar one or two-page agreement. This agreement basically confirms: 1.) that the transaction is “as is” with all defects or with representations otherwise 2.) that the grantor in all cases is conveying marketable title; and 3.) assuring that all tax prorations and nuisance related charges are paid by the grantor. For some REOs donating property, they are comfortable with the National Stabilization Trust contract form which is very lengthy, but provides for delivery of “marketable title”.

Beyond assuring marketable title, and addressing transaction costs and prorations, the LRC should never execute contracts which indemnify the grantor for pre-acquisition or unknown nuisance liens, expenses and water charges.

C. Acquisition Contracts and Due Diligence Efforts

Being “strategic” is a platitude all land bankers, planners and policy makers espouse. What does “being strategic” mean in the context of distressed properties and limited capacity? The predicate to being strategic certainly would require available and credible data and research. Depending on the county, common data bases include GIS, Auditor’s data, Treasurer’s data, Clerk of Court’s dockets, Sheriff’s data, Recorder’s data and private sector real property databases. Even if this data is readily available and reasonably updated, these data bases often do not “see” each other, and certainly not spatially nor in real time. What kinds of filters are useful for analyzing a particular acquisition? On a spatial or geographic polygon basis, certainly these would include:

  • NSP-2 Target areas
  • Surrounding Updated tax delinquency
  • Surrounding Private foreclosures status
  • Surrounding Pending tax foreclosures
  • Surrounding Code violations and condemnation notices
  • Surrounding Active building permits
  • U.S. postal records showing vacancy
  • Surrounding LRC or Municipal Lots
  • Other Planning Districts

To be able to analyze an acquisition with this kind of information promotes strategy. Below is a Case Study. In the face of limited resources, every LRC must have some level of analysis to help guide acquisitions and dispositions.

Case Study

In Cuyahoga County, it was determined that the major destabilizing activities included the aggressive trafficking in properties by HUD, FNMA and tax foreclosure Sheriff’s sales. Of course, private REO’s were and still are engaged in this activity. Because FNMA, HUD and tax foreclosure involve government processes or agencies, it was determined that establishing bulk acquisition agreements to stop this trafficking was, in itself, an important early strategy of the Cuyahoga County LRC. On a countywide basis, HUD and FNMA agreed to transfer all properties valued at $25,000 and under to the LRC. Because Sheriff’s sales also resulted in a high degree of speculation, the Cuyahoga County LRC accepts vacant abandoned properties from BOR tax foreclosure.

As a result, the Cuyahoga County LRC receives in excess of one hundred (100) properties monthly on terms which, by design, are not initially based on a geographic strategy. Through the development of an information system called “The Eye,” the Cuyahoga County LRC is able spatially to quickly evaluate properties and which activities will have more or less impact in light of the factors listed in “The Eye”. By integrating all of the aforesaid public data bases on a spatial level, a parcel’s strategic significance can be evaluated on a street, or entire block, or within a polygon or a concentric ring. Within the specified boundary, the LRC can quickly evaluate the parcel’s proximity to other LRC properties; other city land bank properties; other pending tax foreclosures; tax delinquent properties not yet in tax foreclosure; other abandoned structures or vacant lots; municipally condemned properties; and projects where large building permits have been pulled, etc. By subjecting a prospective acquisition to “The Eye”, the Cuyahoga LRC can be more analytical and strategic.

“The Eye” also allows individual planning districts, localized development plans and other land use plans to be added as filters (i.e., urban agriculture zones, water retention areas, community development plans, shrinkage districts, etc.) in order to promote meaningful land dispositions. Most recently, it signed an agreement with the Northeast Ohio Regional Sewer District to filter its combined sewer overflow areas into “The Eye” in order to acquire properties that will help the region’s above ground water retention needs.

This can be a highly complex activity but is presented here merely to give the reader the scope of possibilities.

Section XII Sample Forms