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Second mortgages keep eye on JV partners

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guest | 11 Apr 2012, 06:52 PM Agree 0

“It’s not something a lot of investors know about and some of those who do may not want to be perceived as untrusting, so they don’t do it,” said Mark Loeffler, a 14-year veteran investor and principal consultant for TheVersatileInvestor.com. “But there are so many benefits to registering a second mortgage on those deals as a way of protecting that investment.”
Indeed.
In placing that secondary lien – equal to their investment amount – money investors place themselves second in any queue of creditors resulting from a default. They also gain firsthand oversight of what their expert partners are doing with the property.
“The second mortgage means that you have to be notified before any other liens are placed or if there is any attempt to refinance the property, for example,” said Loeffler, who usually takes on the role of expert investor, although routinely places a second on deals where he provides the primary funding. “It just protects you on the back-end.”
That manoeuvre is always done with the full consent of all JV partners. Its use is expected to grow as an increasing number of investors form those joint venture relationships as a way of overcoming more rigid lending guidelines.
The continuing growth in property values across most Canadian markets also means many individual investors are having to band together to be able to afford even single-family properties.
But there are other avenues open to money investors looking to protect their own backs.
“Filing a caveat will accomplish some of the same things,” said Greg Head, co-author of The Canadian Investor's Guide to Secrets of the Real Estate Cycle. “It will make sure you’re notified about any refinance or attempted sale, because ‘trust me’ doesn’t work in real estate.”
  • Sasha Bimman | 13 Apr 2012, 11:26 AM Agree 0
    It's not without drawbacks. In a current case before the court, the unscrupulous developer placed the partnership funds with court and continued to plunder. The courts in Ontario view such posting an adequate reason to remove the caveat.
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