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“A novation is the substitution of a new contract for an old one which is thereby extinguished.” Carolina Equip. & Parts Co. v. Anders, 265 N.C. 393, 400, 144 S.E.2d 252, 257 (1965)." Crop Prod. Servs., Inc. v. McDonald, 723 S.E.2d 173 (N.C. App. 2012). "“The intention of the parties to effectuate a novation must be clear and definite, for novation is never to be presumed.” Kirby Bldg. Sys., Inc. v. McNiel, 327 N.C. 234, 243, 393 S.E.2d 827, 832 (1990)..." Crop Prod. Servs., Inc. v. McDonald, 723 S.E.2d 173 (N.C. App. 2012)
In a real estate investment context, the “Novation Agreement”, as they are commonly called, is typically utilized to change the purchaser of the property. Generally, it is used to replace one obligation or party with another in a contract. The terms of the contract maybe changed the new contract. Critically, all parties to the original contract must agree to the changes to execute a novation. Once all parties accept it, the novation nullifies and replaces the previous agreement.
Assignments v. Novations
Assignment contracts are common in wholesaling deals. In an assignment, the wholesaler assigns the benefits of the original contract to another party and the original contract remains intact.
Unlike a Novation, in an assignment deal the assignor (the wholesaler) remains legally responsible for the terms of the contract.
Conclusion
The novation is a tool in the real estate investors’ belt, but it may not always be the best tool for the job. Before attempting to use a novation or an assignment discuss your options with a Licensed Attorney that is familiar with Real Estate Investing.
*The information provided on this site does not, and is not intended to, constitute legal, financial, tax, or real estate advice. Please consult your expert for advice in those areas. All content is for general informational purposes only and is not intended to provide a complete description of the subject matter.
Selecting the right title company to work with is key to your real estate investing success. You may be able to find properties to flip for pennies on the dollar and locate buyers for the homes. However, if you can’t get them closed because of the title agent involved you could find you are not only wasting time but could be at risk of losing money as well.
Your title agent should add value to your real estate investing dream team. Most importantly you must be sure that your title agent is happy to help you on your real estate investing mission. Be upfront and make sure that the title agent you choose is willing and happy to work with your model of real estate investing or they can also educate you on ways to achieve your goals legally and ethically. It is also great to find a title agent with attorneys on staff that you can run questions by for free in order to get deals done.
An independent title agent wants to see your real estate investing career be successful and is often the one that will be going all out to make the closing happen and is absolutely crucial to make sure closings happen. All too often other parties can get cold feet at the last minute. Your title agent is your personal closer who can sell them on the deal and keep it together.
In 2017, title companies uncovered a large-scale national fraud scheme targeting distressed properties and borrowers. In the scheme, criminals would obtain information about a loan in default or already in foreclosure. The wrongdoers then create and record fraudulent instruments related to the loan in the land records. The fraudulent instruments may vest title to the perpetrators, which can allow them to sell or refinance the property.
This fraud has evolved over the past year. Criminals are now hijacking legitimate LLC real property owners by filing fraudulent annual statements of information with Secretaries of State, presenting fraudulent operating agreements, impersonating managing members with counterfeit identification and obtaining hard money cash out loans. This is typically happening with free and clear vacant land, meaning the criminals disappear with the money.
In many instances, the criminals are getting on the websites of Secretaries of State and modifying the statements of information online. Traditionally, title companies have relied on the validity of Secretary of State filings to help confirm the managing member. This is not a safe bet anymore. In addition, many Secretaries of State are not reviewing statements of information to confirm that the last managing member shown on the previous filing is the same as the latest filing. This basically allows anyone to hijack an LLC.
"The bad guys are exploiting the hard-money space due to the focus on the collateral, not the borrower, and their tendencies to not meet the borrower and transact the loan online and through email," said Bill Burding NTP, executive vice president and general counsel of Orange Coast Title Company. "This allows domestic and overseas criminals to commit loan and title fraud."
Additional scrutiny of the LLC is required, including a review of the entire SOS SI chain, comparing the date of the operating agreement to when they were incorporated and purchased the property. It should also be required, as practical as possible, for the lender and escrow to deal with the principals in-person.
They call them CBA’s or AfBA’s (Controlled Business Arrangements and Affiliated Business Arrangements) and they are legal as long as the nature of the business is disclosed to the buyer. The disclosure consists of a piece of paper stating basically XYZ Title Agent has a Controlled Business Arrangement with Mega Bank … Please sign here.
But what does that arrangement really mean? Well, Mega Bank owns XYZ Title Agent and XYZ Title Agent does what Mega Bank tells it to do.
So what does that mean to the buyer? Let’s say that Mr. Buyer is purchasing a foreclosed property and XYZ Title receives the title opinion from the closing attorney and that opinion discloses some problems with the foreclosure. As chances have it Mega Bank was the foreclosing lender. XYZ Title spots this and knowing that these foreclosure errors will bother Mega Bank, issues Mr. Buyer a clean title policy.
Great for Mr. Buyer – right? Not really, you see the error that XYZ Title agent so graciously ignored was the fact that the Out of State Foreclosed Owner was never provided notice of the foreclosure. Mr. Buyer found this out when the former owner knocked on the door and asked why someone was living in his house. Sure, the Title Insurance Underwriter will probably cover the claim, but that can take years. Does Mr. Buyer really need the stress of worrying that he might lose his home?
An Independent Title Agent would have refused to permit the transaction to close until the title was clear! CBA’s and AfBA’s have a benefit, but it’s not for the buyer, it’s for the owner of the CBA or AfBA.
Whenever there’s an article in the news about title insurance, all too frequently there is criticism about the cost. This perception occurs because there are fewer claims with title insurance compared to other forms of insurance. The higher percentage of claims an insurance company pays should not be equated with the value and cost of the policy. This is especially true with title insurance.
Most types of insurance cover incidents that may occur in the future, which is the case with health, life, auto and homeowner’s insurance. The cost of these policies is based on the insurers’ estimation of how much they will likely pay out in claims over a given period, plus administrative costs and a reasonable profit. The volume of claims is typically high with these types of insurance.
Title insurance, on the other hand, is based on loss prevention, which means that a much larger percentage of the premium dollar is spent preventing title problems from occurring. These upfront costs cover searching, identifying and eliminating risks that could result in a future claim.
A typical title search involves searching the public records, including visits to the offices of recorders or registers of deeds, clerks of courts and other officials, and the company’s own title plant. Title professionals look for such things as second or third mortgages, judgments, liens, street and sewer system assessments, special taxes and levies, and
numerous other matters. No other line of insurance does this level of due diligence before issuing a policy.
Over the long term, title insurers pay fewer claims than other insurers, but their operating expenses are much higher because of these upfront costs. To compare, operating expenses for property and casualty companies, which issue auto and homeowners insurance, is less than 30 percent of revenues. The expense ratio for title insurers averages 90 percent.
Another reason some mistakenly believe that title insurance costs are his is because they don’t fully understand its value. Title insurance protects the single largest financial investment most people make. One out of every four residential real estate transactions has an issue with the title, which is usually resolved by title professionals before the buyer closes.
When there is a claim, it is often due to a title defect that was undetected during the title search. The most common problems resulting in title claims are the result of fraud and forgery. And, when there is a loss, it is usually significant—sometimes in the hundreds of thousands of dollars.
An Owner’s Policy of Title Insurance, which can be obtained in addition to a Loan Policy, remains in effect for as long as the policyholder (or their heirs) owns the property that is insured. A claim could actually be filed 50 or 100 years after the policy was issued. And, an Owner’s Policy covers legal expenses involved in defending the title on behalf of the homeowner.
The cost for title insurance is a one-time fee, as opposed to other lines of insurance that charge a monthly, quarterly or annual premium over the life of the policy. When you consider the size of the asset being protected, title insurance is probably the best value among the majority of costs associated with closing on a new home.
“I’m getting Title Insurance, so I don’t need a survey.” “I’m buying new construction, so I don’t need a survey.” “The property I’m buying has been owned by the same family for a 100 years, so I don’t need a survey.”
WRONG, WRONG and WRONG! These are but a few of the fallacies or urban legends that exist in regard to the necessity of a survey for land transactions.
When you purchase title insurance without a survey, you are insured that the seller owns the property and has the right and ability to convey marketable title to you. The title company will typically except from coverage any state of facts an accurate survey would show. (The current ALTA Loan policy provides survey coverage to lenders.)
The following are a few examples of what could happen if you choose not to obtain a survey.
Horror Story No. 1: You purchase a home in a new subdivision and the builder points out the fine fences he has built around your new home-to-be. The builder and realtor have impeccable reputations and you are happy to buy the home without the added expense of a survey. Until the day you discover that the house you love is not located on the lot you bought! The realtor, builder and title company are all embarrassed (and potentially may have some liability), but YOU are the one who has to live with the HEADACHE.
Horror Story No. 2: Farmer Old MacDonald is getting a bit long in the tooth and wants to settle his affairs by giving his land to his two children and selling his house to an outsider. His deed says he owns 45 acres of land. His plan is to prepare two deeds for his children. One is for "the west 15 acres of my land" and the other is for "the east 15 acres of my land." The 15 acres between the two tracts includes the house and is offered for sale.
You are considering purchasing the house and 15 acres for cash and your attorney recommends that you hire a surveyor to locate the undefined boundaries. The resulting survey reveals that after two prior 15 acre conveyances are severed, the remaining tract is only 3 acres in area because the original, unsurveyed tract only encompassed 33 acres instead of the 45 acres recited in the old deed. With this information, you now have the opportunity to reevaluate the whole deal. Without the survey you would have purchased 3 acres for the price of 15!
Horror Story No. 3: In 1948, Farmer Brown willed his 160 acre family farm to his two sons and described an 80 acre parcel to be conveyed to each. One son stays on the farmstead and builds his home, barns and other improvements. The second son moved to Oregon and has not seen his land since he left. You are considering buying the beautiful farm of son #1 and the title is clean and unencumbered. Everything appears to be in order, but your attorney wisely advises that a survey be made before the purchase. To everyone's surprise (including son #1) the survey reveals that the two brothers have mistakenly occupied the wrong tracts for all these years.
The title insurance company does not visit the land. In this case, they knew that son #1 was willed an 80 acre tract, but they did not know where his house was! Only the surveyor puts the two features together and locates the deeded tract on the ground.
So what should you do? Hire your own attorney, select an independent title agent and get a survey!
If you are considering purchasing a foreclosure or pre-foreclosure property have your title search completed as part of your due diligence. No adequate assessment of the true amount of equity required for the targeted foreclosure property, and therefore of potential profit, can be made until you know what liens and/or encumbrances are recorded against the property.
A Title search of the property is undertaken in most real estate transactions by the buyer’s attorney or a title company. It is a way of assuring the advisor to the buyer that the party offering this property for sale has the legal right to do so, that the correct legal description of the property was used in the recorded documents, and that there is nothing preventing the buyer from owning exactly what he intends to purchase.
This search of the public records also gives the details of who has previously owned the property (the Chain of Title). It typically includes a tax search, which reveals if any real estate taxes are owed and also any charges against the land itself. Any unpaid property taxes maintain priority over most other liens. If you were to purchase a pre-foreclosure without knowledge of a tax lien, then you face the loss of your new investment unless you settle the debt. Title insurance could have protected you, but there’s no going back…
Just as important in the review is to locate any unsatisfied judgments against the owner/seller or any of the previous owners (most judgments are enforceable against the property for 10 years). Mechanics liens, judgment decrees, and unpaid federal income taxes are just a few examples of liens which may have priority over the lenders rights. It is not unusual for a property in foreclosure to have debts owed on second or even third mortgages (junior liens). Junior liens have a lower priority than the first mortgage holder when it comes to allocating the proceeds of the trustee or auction sale.
Your attorney will demand that the seller remove any defects in the title so that you, the buyer, receive marketable (or insurable depending on the terms of the contract) title and can obtain Owner’s title insurance. Remember, a lender’s title insurance does not protect the buyer. If you are looking to invest in the foreclosure market, take the extra step and minimize your risk. Get title insurance from an independent title agent with experience in foreclosure/REO transactions.
Anna recently purchased her new dream home. She was especially grateful for the fact that two months before the closing the seller replaced the roof. She had replaced the roof on her prior house and she was relieved that she would not have to incur that expense. To her shock she soon discovered that the seller never paid the roofing contractor! Shock soon turned to frustration when two days after the closing the roofing contractor filed a mechanic’s lien in the amount of $10,000, which he could foreclose against Anna's new home.
Anna called her closing attorney and her lawyer told her that was why she purchased an Owner’s Title Insurance Policy. Anna contacted the Title Insurer and submitted her claim. Anna learned that her title insurer would take care of the whole problem. She had an Owner’s Policy that provided coverage for such liens. Her insurer contacted the roofing contractor and after a few months of negotiation the claim was settled and resolved. In the end Anna was safe and secure under her new roof and she never had to worry about the mechanic’s lien.
Anna’s onetime payment for title insurance saved her over $10,000 and months of headaches.
1. Errors in public records
Clerical or filing errors could affect the deed or survey of your property and cause undo financial strain in order to resolve them.
2. Unknown liens
Prior owners of your property may not have been meticulous bookkeepers — or bill payers. And even though the former debt is not your own, banks or other financing companies can place liens on your property for unpaid debts even after you have closed on the sale. This is an especially worrisome issue with distressed properties.
3. Illegal deeds
While the chain of title on your property may appear perfectly sound, it's possible that a prior deed was made by a minor, a person of unsound mind, or one who is reported single but in actuality married. These instances may affect the enforceability of prior deeds, affecting prior (and possibly present) ownership.
4. Missing heirs
When a person dies, the ownership of his home may fall to his heirs, or those named within his will. However, those heirs are sometimes missing or unknown at the time of death. Other times, family members may contest the will for their own property rights. These scenarios — which can happen long after you have purchased the property — could affect your rights to the property.
5. Forgeries
Sometimes forged or fabricated documents that affect property ownership are filed within public records, obscuring the rightful ownership of the property. Once these forgeries come to light, your rights to your home may be in jeopardy.
6. Undiscovered encumbrances
At the time of purchase, you may not know that a third party holds a claim to all or part of your property — due to a former mortgage or lien, or non-financial claims, like restrictions or covenants limiting the use of your property.
7. Unknown easements
You may own your new home and its surrounding land, but an unknown easement may prohibit you from using it as you'd like, or could allow government agencies, businesses, or other parties to access all or portions of your property. While usually non-financial issues, easements can still affect your right to enjoy your property.
8. Boundary/survey disputes
You may have seen several surveys of your property prior to purchasing, however, other surveys may exist that show differing boundaries. Therefore, a neighbor or other party may be able to claim ownership to a portion of your property.
9. Undiscovered will
When a property owner dies with no apparent will or heir, the state may sell his or her assets, including the home. When you purchase such a home, you assume your rights as owner. However, even years later, the deceased owner's will may come to light and your rights to the property may be seriously jeopardized.
10. False impersonation of previous owner
Common and similar names can make it possible to falsely "impersonate" a property owner. If you purchase a home that was once sold by a false owner, you can risk losing your legal claim to the property.
Bonus: Download my eBook "7 Reasons Why Every Homebuyer Need's Owner's Title Insurane"
1. Title Insurance helps protect your ownership rights to your home.
Through the search and examination process, defects, liens, and encumbrances in the chain of title that could adversely affect your ownership interests in the property can be discovered. And, while it is required by a lender, it shouldn’t be confused with homeowner’s insurance, which is also usually required by a lender during closing. While homeowner’s policies will protect against an accident occurring in the future, such as a fire, title insurance policies protect against events that happened in the past that may have an impact on who owns the land, such as an unreleased mortgage, fraud or forgery (identity theft).
2. There are two different policies of title insurance involved in a home purchase.
If the buyer is securing a mortgage to complete the purchase, the lender will require a type of title insurance policy designed to protect only the lender’s interest in the property. This is called a loan policy. The home purchaser should also purchase an owner’s policy of title insurance, which protects their interest in the property for as long as they own it. When both policies are purchased the buyer receives a simultaneous issue rate, which reduces the cost of the two policies.
3. Title insurance professionals may be able to take curative action necessary to protect your interest in the land.
When a title insurance policy is ordered, title professionals together with real estate attorneys utilize public property records to identify and remedy, if possible, issues from the past that could affect the ownership of the property. Your owner’s title insurance policy protects you against defects, liens, and encumbrances not disclosed by the title examination and reported in the policy.
4. You only pay for an owner’s policy of title insurance once.
Paid at closing, an owner’s title insurance premium is a one-time fee. The coverage included in the policy, however, lasts as long as the insured parties (or their heirs) hold an interest in the property. By contrast, loan policies are no longer in effect once the loan is paid off or refinanced. If the property is refinanced in the future, the lender (even the same lender that held the previous loan) will require a new loan policy to protect their interests in the new loan.
5. You have the right to select the title company of your choice.
The Real Estate Settlement Procedures Act and North Carolina Law protect homebuyers’ rights to select their providers of various settlement services. This includes title insurance companies. Homebuyers should know they are free to work with the title company that they are most comfortable with. When a title policy has been issued on Identical Land within fifteen (15) years, the purchaser is entitled to a re-issue rate, which may reduce the premium by as much as 50%. (Note: The previous policy or HUD-1 must be provided in order to provide the insured with a reissue rate.)
