Latest / Real Estate Note Investing / Episode 63: Escrow Advances and Corporate Advances

Transcript

Episode 63: Escrow Advances and Corporate Advances · Real Estate Note Investing

• 0:00
  SPEAKER_00: Welcome to the show, where you'll learn how to invest in mortgage notes, the savvy real estate investor's secret weapon to create cash flow without tenants and property acquisitions for pennies on the dollar.
• 0:12
  SPEAKER_00: My name is Robert Haitha, founder of Fix Notes, and my mission is to make note investing ethical, profitable, and accessible for you.
• 0:20
  SPEAKER_00: In every episode, we're democratizing the industry to put these powerful Wall Street assets into the hands of mainstream investors like you.
• 0:29
  SPEAKER_00: So without further ado, let's get into this show where you're in good hands with my AI clone.
• 0:34
  SPEAKER_00: Let's go.
• 0:37
  SPEAKER_00: This program is for informational purposes only and should be independently verified before taking action.
• 0:43
  SPEAKER_00: When you hold a mortgage note, your security is the property.
• 0:46
  SPEAKER_00: And what protects the property?
• 0:48
  SPEAKER_00: What keeps it from being taken by a tax authority, deteriorating from lack of insurance coverage, or accumulating municipal violations is the ongoing payment of certain obligations that sit in front of your lien.
• 0:59
  SPEAKER_00: When a borrower stops paying those obligations and nobody else steps in, the collateral securing your investment is at risk.
• 1:06
  SPEAKER_00: Escrow advances and corporate advances are the mechanisms by which a lender can step in, pay those obligations on the borrower's behalf, and protect their position.
• 1:14
  SPEAKER_00: Understanding how they work is a practical necessity for any ActiveNote investor.
• 1:18
  SPEAKER_00: Start with escrow.
• 1:20
  SPEAKER_00: On a performing mortgage, a portion of every monthly payment typically goes into an escrow account managed by the servicer.
• 1:26
  SPEAKER_00: That account pays the property taxes and homeowner's insurance when they come due.
• 1:31
  SPEAKER_00: The borrower does not have to think about it.
• 1:33
  SPEAKER_00: The servicer handles it automatically.
• 1:35
  SPEAKER_00: This escrow arrangement is extremely common on first position mortgages.
• 1:39
  SPEAKER_00: That is one reason junior lien investors benefit from a current first lien in front of them.
• 1:43
  SPEAKER_00: The senior lender is protecting the property by keeping taxes and insurance current, which in turn protects the collateral that secures the second lien.
• 1:51
  SPEAKER_00: When you own the first position loan and the borrower is not making payments, there is no incoming cash to fund the escrow account.
• 1:59
  SPEAKER_00: Taxes and insurance come due anyway.
• 2:02
  SPEAKER_00: If they go unpaid long enough, you face real consequences.
• 2:05
  SPEAKER_00: In a tax deed state, unpaid taxes can eventually result in the county taking the deed and wiping out your first position lien entirely.
• 2:13
  SPEAKER_00: Without property insurance, a fire or catastrophic event leaves you with no coverage on the collateral.
• 2:19
  SPEAKER_00: In either case, your secured position becomes worthless.
• 2:22
  SPEAKER_00: That is why first lien investors who are carrying non-performing loans need to actively monitor and in some cases advance the payment of taxes and insurance.
• 2:31
  SPEAKER_00: An advance made by the lender to pay property taxes, insurance, or other property-related expenses on behalf of the borrower is called a corporate advance.
• 2:39
  SPEAKER_00: This is a payment you make out of your own pocket to protect your investment.
• 2:42
  SPEAKER_00: The critical thing to understand is that corporate advances are typically recoverable.
• 2:46
  SPEAKER_00: That means they get added to the loan balance as a lender expense that the borrower owes you.
• 2:51
  SPEAKER_00: They are not a gift.
• 2:52
  SPEAKER_00: They are a loan, effectively.
• 2:54
  SPEAKER_00: Money you are fronting on the borrower's behalf, they are obligated to repay as part of their total obligation when the loan resolves.
• 3:00
  SPEAKER_00: Every state and county has its own rules about what kinds of expenses qualify as recoverable lender advances and how they must be documented.
• 3:08
  SPEAKER_00: Your foreclosure attorney and your loan servicer are the right people to consult on the specific rules that apply to any given loan.
• 3:15
  SPEAKER_00: When you pay in advance, run it through your servicer so that the expense is properly tracked in the loan accounting.
• 3:20
  SPEAKER_00: If you ever need to foreclose, your servicer and attorney can itemize the recoverable advances in the foreclosure filing as part of the total amount the borrower owes.
• 3:27
  SPEAKER_00: Advances that are properly documented and tracked will be included in your upset price at a foreclosure sale, meaning you recover them if the property sells.
• 3:36
  SPEAKER_00: Advances that are paid out of pocket and never documented through the servicer may not be recoverable at all.
• 3:41
  SPEAKER_00: The most common corporate advance in note investing is a property tax advance.
• 3:45
  SPEAKER_00: If taxes are delinquent and you own the first position loan, you may need to pay them down before a certificate is issued or before a redemption period expires.
• 3:54
  SPEAKER_00: There is a per diem rate on most delinquent tax balances.
• 3:57
  SPEAKER_00: An additional amount that accrues every day the balance remains unpaid.
• 4:01
  SPEAKER_00: Understanding that rate helps you decide whether to pay the taxes immediately or wait until a resolution with the borrower is closer.
• 4:08
  SPEAKER_00: Sometimes the per diem is nominal enough that you can fold the tax payoff into a modification agreement or a short sale closing rather than advancing it up front.
• 4:16
  SPEAKER_00: For second lien investors, corporate advances are less common because the first lien in front of you is usually handling taxes and insurance.
• 4:23
  SPEAKER_00: But there are situations where a second lien investor will advance expenses, particularly legal costs like demand letter fees or foreclosure retainers.
• 4:31
  SPEAKER_00: These attorney fees can also be documented as recoverable lender expenses in many states, meaning the borrower owes them, in addition to the principal, an interest balance when the loan resolves.
• 4:41
  SPEAKER_00: Your attorney will specify on their invoice whether each line item is a recoverable lender expense or a non-recoverable one.
• 4:48
  SPEAKER_00: Read those invoices carefully and track the recoverable items through your servicer.
• 4:53
  SPEAKER_00: The broader principle at work here is protection.
• 4:56
  SPEAKER_00: Every dollar you advance to protect your collateral is a dollar that preserves the value of your investment, managing advances wisely, knowing when to pay, how to document them, and how to recover them.
• 5:06
  SPEAKER_00: It is part of what separates a sophisticated note investor from one who discovers these obligations only after they have already caused damage to their position.
• 5:15
  SPEAKER_00: Next time, we are going to look at when selling the note makes more sense than continuing to manage it, and how to evaluate that decision clearly.
• 5:23
  SPEAKER_00: Thanks for sticking around to the end, and thank you to my trusty Robot and the Fixed Notes team for putting together another episode.
• 5:31
  SPEAKER_00: If you want to learn more and hang out with the real not AI version of me, join our free school community at school.com slash fixed notes.
• 5:40
  SPEAKER_00: That's s ko-l.com slash f I X N O T E S.
• 5:46
  SPEAKER_00: In the meantime, we'll see you in the next episode.