I was recently looking at a property to lend on just west of Denver. The borrower paid 3m cash for the property a few months ago. He requested a loan of 750k. Sounds like a no brainer loan as the property was in a great location. There was one problem that the buyer was not aware of that made this property essentially worthless. I couldn’t believe something so simple was overlooked. I found this out the hard way when I went out to look at the property and meet the borrower.
As a private lender we physically look at every property since we do not require appraisals. This property was no different. I was very familiar with the area as I had lived a few miles away for many years. The property was a “trophy” ranch in the foothills west of Denver. It consisted of various ponds, creeks, and had a large 10k foot house that had historically been used as a lodge. The lodge sat on 80 acres surrounded by the national forest. It was a beautiful property in an excellent location. It was extremely rare to get this size acreage this close into Denver.
The property had recently been purchased for about 3 million dollars all cash. I got a copy of the settlement statement and everything looked in order. Before setting up the inspection, the borrower had sent me the various easements since to access the property the road crossed over other private property. Seemed like a no brainer.
There was one big problem!
When I am out looking at properties I typically use the app WAZE (basically a mapping program owned by google but also give good traffic updates, road conditions, etc…). As I am driving to the property, I look at the Waze map and shows part of the road passes through the national forest. It was a few hundred feet. I also keep a book that has topographic maps of the state of Colorado (I’m an avid fly fisherman and hiker and routinely get a bit adventurous and bushwack off trail). Looking at the topographic maps, it clearly showed the national forest boundary. The problem was there was not a formal easement across the forest service property.
Why is this a problem?
Without a formal easement from the forest service on record this property was essentially landlocked and no title company would provide insurable title for property access. In essence the property is not saleable since any prospective buyer would want insured access to their property. This is a very difficult problem to solve. If the easement was needed over private property you could file a court case to gain access since you could likely show historical use. It would be expensive and take a while but it is possible to resolve. The US government is radically different.
Access is not automatic even when it is a statutory right. It must be a proper and lawful purpose and will be subjected to compliance with rules and regulations governing the lands and the roads and trails to be used, including authorization in writing. In U.S. v. Randolph Jenks, 129 F. 3d, 1348, 10th Cir. 1997 and Raymond Fitzgerald v. U.S., 932 F. Supp. 1195, D. Ariz. 1996, the courts ruled that there was no right of access provided to the current owner and, even if there was, the requirements to grant an easement to regulate the use and protect the resources of the National Forest System lands was upheld. The rulings also held that the Forest Service had the right to require an easement to access the in-holdings (source: US Forest Service)
How was this missed?
The borrower didn’t realize that he did not have this access over the national forest and he did not get a title policy that insured his access and the various easements
What can you do?
The issue above is not unique to a residential property crossing over forest service land. This could be a commercial property that needs access of a county road and doesn’t have the appropriate curb cut, etc… If the property does not have access directly off a county/state road with the appropriate curb cuts, etc… you need to be very careful. You need to be certain you have an updated valid survey with access/easements highlighted. Request the title company provide insurance for any survey matters so that you can be certain you have access. If there are easements, make sure you go through to understand if there are road agreements for maintenance, etc… so you know what you are getting into
Summary:
We are in a fast-paced real estate market in many parts of the country. The last downturn taught us that both ourselves and others made mistakes when we didn’t focus on the details due to the pace of the market. Now is the time to be extra careful on your due diligence so you don’t end up with a 3m mistake that could have easily been prevented with some basic due diligence.
I need your help!
Don’t worry, I’m not asking you to wire money to your long lost cousin that is going to give you a million dollars if you just send them your bank account! I do need your help though, please like and share our articles it would be greatly appreciated.
Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in the Colorado Real Estate Journal, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
Fairview is a hard money lender specializing in private money loans / non-bank real estate loans in Georgia, Colorado, Illinois, and Florida. They are recognized in the industry as the leader in hard money lending with no upfront fees or any other games. Learn more about Hard Money Lending through our free Hard Money Guide. To get started on a loan all they need is their simple one page application (no upfront fees or other games).