How a notice of interest can save your real estate investment deals

The letters NOI stand for Notice of Interest or are sometimes incorrectly called Memorandum of Contract or MOC. It is usually a one-page document stating that the person submitting the document for registration with the county clerk’s office has an equitable interest in a property because of a signed sale and purchase contract.

The NOI is most commonly used when an investor signs a purchase and sale contract with a homeowner/seller and wants to show anyone trying to make another bid on the property that they have a legal interest in the property. This is the case where someone else, usually another investor, comes along and offers the homeowner a higher price.

The practice of investors outbidding real estate after contracting with them is becoming more common in distressed markets but it occurs even in normal markets. Investors who regularly make statements to homeowners like, “Get your highest bid from those other guys and call me back, I’ll give you more money than any of them – I just need to see it in writing.” The ugly part of this statement is the term “in writing” because that usually means that the contract must be signed by the homeowner.

While I can’t blame the homeowner for wanting more money, what I’ve often seen happen is a black hat investor tries to steal the deal, and actually gets to the closing table and renegotiates the price back below what it was. Originally offered to trusted seller. How do I know? I’ve been on the other side of his offers and had to fight to keep my seller.

So we sometimes have to struggle with shutdowns and I’ve covered this in other articles on how to do that. The ironic part is that it is a criminal offense to “get” someone to sign a contract when there is another. The district attorney’s office will handle these cases if you provide evidence and the seller cooperates – which is usually the case when a homeowner is threatened with a lawsuit or foreclosure.

So when we sign a contract with a vendor we always record a NOI number in the public record which is effectively a lien against the property. I want to repeat this because the nitty gritty of this “privilege” is far reaching. This NOI must now be released as a lien on the property before title can be transferred unless there is a foreclosure action to extinguish it, or the lien holder (the original investor/buyer) initiates a foreclosure action to take the property. If this sounds harsh, it’s just a problem-solving where one party to the contract doesn’t break their contractual terms—just as a lender does with a homeowner.

The NOI does not need to be signed by the homeowner/seller in order for anyone to place an NOI on anyone’s property. Just remember, there’s usually a sign in the Clerk’s office that says, “If you enter an invalid lien, it’s a felony,” so think carefully about what you’re doing before you do it—don’t do it in anger or it could cost you a lot of attorney fees.

Having said that, the courts and sometimes the record clerk treat the NOI as unruly in-laws. They may tolerate these fees, but they don’t like them so much because of the historical issues with the seller not knowing that these perks were given. Many standard real estate contracts specifically prohibit the submission of a notice of interest to be recorded in the public record. This prohibition can be overcome by expunging the clause on it and having both the seller and the buyer proceed on it, or by adding a clause or appendix to your contract.

Once the NOI is filed in the public record, the next time the title is transferred, the title agent must obtain a release from the signed NOI to write a title policy on the property or note it as an “exception” in the policy. If the NOI is not terminated through the release of the lien, the title is “cloudy” and needs clearing and the transfer to a new buyer may not proceed properly.
This is where you come in to cancel your reservation, and it usually happens when you least expect it – before you plan to lock yourself out! Sometimes a homeowner calls when he gets a copy of a registered NOI from Clerk’s Office and wasn’t expecting it — either way, the seller tries to back out of the transaction. Sometimes the seller changed his mind for good reason, more often than not it wasn’t.

You have two options when the NOI “hits” the fan to say:

1.) Release your NOI with release hold document and get paid for release hold

2.) Honker and killer seller to come to closing or get paid to release foreclosure.

In short, your choice is personal and is determined by the potential profit lost on the deal, the homeowner/seller’s real motivation for not wanting to sell, how much you can get for the foreclosure release, and the disposition of that day. In the final analysis, the choice is yours to force the seller to close or release the foreclosure.

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