Foreclosure Buyer Buys a Billion Dollar Property for $100k! (Sort of.)

If you’re looking to get rich off foreclosures, let me tell you about the guy in California who bought a billion dollar property for $100k…. 

I’m talking about this New York Times story, subtitled: “Did someone really walk into an auction and buy the priciest piece of real estate in California for $100,000? Well, yes and no.

5d5e699fadbcf8151123d244-750-563If you’ve dealt with foreclosures, then you’ve heard the story about the guy who happened to walk past the courthouse foreclosure with no bidders, knew the property being sold, bid $100 for the house, and won a house. Great story, right?

The reason the New York Times is talking about this famous 157-acre plot of land in California is that it was initially listed for sale for one billion dollars and then was cut to a more reasonable $650 million asking price. Jeff Bezos, Tom Cruise, and Brad Pitt have all kicked the tires on buying this property.

So, on August 20, when the the property sold at a foreclosure sale for the high bid of a mere $100,000, people noticed.

What a steal, right?  Not so fast, the story continues:

That seemingly bargain-basement price came with a condition: that the estate forgive the $200 million loan. Any other buyer would have had to pay at least $200 million at auction to cover the debt.

This reminds me of my “buyer-beware” foreclosure post from 2010.

As a general rule, foreclosure sales wipe out liens behind the foreclosing instrument, but they are subject to any senior liens (liens recorded before the lien being foreclosed).

With this in mind, always remember that a foreclosure sale will be subject to senior liens.

For that California property discussed above, the $100,000 bidder was buying the property, but subject to that $200 million lien.

To be clear, the buyer didn’t become obligated or assume that debt; it just means that the first mortgage still has a valid claim and lien on the property, and the foreclosure bidder had better make arrangements to pay off that debt…or the property gets foreclosed a second time.

But, on paper, it’s still a pretty good deal. I mean, the buyer can frantically try to sell it and, if they can sell it for half of the last list price (i.e. $325,000,000), that’s still a great day at the office.

 

 

Economic Loss Doctrine Prevents Double-Dipping in Damages

Sometimes I use this blog as a notepad for obscure legal theories that I’m going to use later.

Like this one, on the “economic loss doctrine.”

If you have a plaintiff who sues you both for breach of contract damages and for tort damages arising out of the same transaction, you may be able to get the tort claims dismissed, per a Tennessee Court of Appeals opinion released yesterday.

The case is Milan Supply Chain Solutions, Inc. v. Navistar Inc. et. al,  W201800084COAR3CV,  2019 WL 3812483 (Tenn. App. Aug. 14, 2019), and it discussed this rule, known as the “economic loss doctrine.” The theory was “created by the courts to avoid the ‘coming collision between warranty and contract on the one hand and the torts of strict liability, negligence, fraud and misrepresentation on the other’.”

The heart of the concept is stated as:

[C]ontract and tort are separate and distinct areas of the law that provide separate and distinct remedies. A party who enters into a contract which contains terms that limit recovery in the event of a breach [is] typically unable to circumvent such provisions by alleging a tort occurred as well. The warranty or contract’s terms and conditions set forth the rules governing the relationship, and tort law does not expand the remedies of the contract beyond the agreed-to terms. Absent personal injury or damage to other property, the sole remedy lies in contract.

The theory is that a party to a contract is free to contract for the terms of their purchase agreement, and this doctrine protects the right to allocate risk in a transaction.

A good “real life” example of this would be where a party limits the damages for breach in a real estate transaction, such as by providing that damages are limited to a return of the deposit to the buyer. Under this theory, the buyer would not be able to, later, subvert that contract provision by suing for damages in tort.

Tax Sale Buyers Beware: Your property could be Redeemed

Sure, one of the best deals in distressed real estate is to buy property at a county tax sale, where you can purchase a property–basically–at an opening bid that is generally the past due taxes.

But, that strategy has a number of down-sides. The biggest is the taxpayer / property owner’s ability to “redeem” the real property by coming back and paying the debt.

This redemption period is defined at Tenn. Code Ann. § 67-5-2701 and, generally, lasts a year.  And, trust me, if you’ve paid money for a distressed property that’s gone to a tax sale, you probably don’t want to wait an entire year to do anything with the property, especially where the property is abandoned or in disrepair.

Well, the Tennessee Legislature has some good news for you. In legislation sponsored by John Stevens in 2019, there are some changes to the redemption law that allows a shorter redemption period based on the number of years a property has been delinquent.

This is quickly summarized as follows: Continue reading “Tax Sale Buyers Beware: Your property could be Redeemed”

Tennessee Supreme Court provides deep analysis on elements of “novation”

The Tennessee Supreme Court issued a new opinion today, which is notable for a few different reasons.

First, it discusses a legal dispute over The Braxton, which was a luxury high-rise condo building in Ashland City, Tennessee, and which is considered by some to be one of the first big development “fails” of Great Recession Nashville.

Second, the case provides a comprehensive analysis of the law on novation.

The case is TWB Architects, Inc. v.  The Braxton, LLC  No. M2017-00423-SC-R11-CV (Tenn., July 22, 2019).

At its most basic, “novation” is when a party substitutes a new obligation for an existing obligation, such that, after the novation, the second obligation is the only legally binding remaining obligation. Continue reading “Tennessee Supreme Court provides deep analysis on elements of “novation””

Attend the Creditors Practice Annual Forum 2016, Learn Foreclosure in an Hour!

On September 28, 2016, some of the greatest creditor minds in Nashville will gather for the Creditors Practice Annual Forum 2016. Yes, I’m talking about foreclosures again.

Topics to be covered include:

  • Perfection and Enforcement of Liens for Prime and Remote Contractors
  • Non-Judicial Foreclosures in Tennessee
  • Ethical Issues Related to the Consumer Financial Protection Bureau
  • TBA Special Committee on the Evolving Legal Market Report

I’ll be presenting the Foreclosures portion of the seminar, which will give a one-hour overview all the laws, defenses, and issues facing lenders conducting foreclosures in Tennessee.

This should be a good seminar, so be sure to sign up to attend the live presentation, or use some of your free CLE credits from your Tennessee Bar Association membership to watch it online.

 

Ex-Tennessee Titan Sued by Former Landlords for Property Damage

Real Estate is hot in Nashville. That’s not a news flash. In fact, unless you were burned in the economic downtown, you’ve probably always thought that real estate is a safe investment, either has an appreciating asset or as an income producing asset.

With high-end real estate, the income possibilities in this current market are endless. Short term rentals to tourists on AirBNB. Long term leases to health care executives. Leases to country music stars or professional athletes.

Well, one Nashville couple has learned the hard way that leases to star football players may require a greater security deposit.

In a lawsuit filed against former Tennessee Titan running back Zach Brown, a landlord for rental property has sued in Nashville’s Davidson Chancery Court (Rental Lawsuit), alleging failure to pay rent. After they were awarded a judgment in a prior detainer action, they were surprised to find the property in terrible condition, the lawsuit alleges.

The $59,286.85 in damages alleged includes claims of: animal teeth marks on staircases and doors; stains on carpet; “damage to the walls by what appears to be repeated throws of footballs and darts;” holes in the wall; and door frame damage “from where it appears a locked door was forced open.”

These are just allegations, but, long story short, a property owner opens the door to deterioration and damage when he or she rents to a stranger. There’s no such thing as easy money, and the landlord / tenant model has its fair share of risks.

 

 

 

Speaking at 2010 Tennessee Real Estate Law Conference, by M. Lee Smith Publishers

On December 9 and 10, 2010, I’ll be speaking at the 2010 Tennessee Real Estate Law Conference, presented by M. Lee Smith Publishers.

This group always puts on great seminars on relevant topics, and the faculty looks really strong.

My portion is going to be presented on December 10, at 2pm to 3pm, titled “A Primer on Real Estate Liens.” Here’s the full agenda.