According to the Census Bureau, over 50% of household net worth in the United States is held in real estate, and among investors, real estate makes up 13% of all asset classes. As a result, when collateral is required to secure an appeal bond, the ability to use real estate is often critically important for appellants.
There are only a couple of surety companies in the market that will accept real estate as collateral to secure appeal bonds, and because of that, there are often many unknowns about the process, which we hope to clarify in this article.
What properties are eligible?
Many of the typical mantras in the real estate world are used by sureties when considering what properties they will accept as collateral. This being the case, it will come as no surprise that location is one of the top considerations, and a surety may be willing to take a less than pristine property in an excellent area; whereas, they may not be interested in a “5 Star” property in undesirable location.
The type of property is also a factor. Residential property is easier to use given how readily sellable they are. Investment properties such as standard office, industrial and multi-family apartments can be attractive as well, but the values are harder to determine than single family residential, and they usually take longer to sell. Sureties usually ask for detail on rents being paid on investment property, and those that have strong cash flow in excess of any debt are more attractive since the surety won’t have to worry about putting money into the property if they have to foreclose.
When it comes to commercial property the use is very important. For example, hospitals are generally not accepted, because of the limited number of buyers and the need to comply with government regulations. A vineyard would be another example of a property that a surety may find difficult to use, because again there is a limited market of buyers and they typically take a long time to sell.
Another type of property that few are aware of as an option is raw land. For it to be considered, it must be in a highly desirable area and free of any debt.
How is the equity determined by the surety?
In order to determine the equity, sureties typically require an appraisal, which the client has to pay for. Residential appraisals typically only cost a few hundred dollars, but commercial appraisals can run in into the thousands depending on the type of property. There are instances where a surety may be willing to waive an appraisal such as a property in a good area, free and clear of debt, and worth substantially more than the appeal bond required.
The sureties then discount the appraised value by 20% to 50% depending on factors like location or any other unique factors they believe may impact their ability to sell the property. For example, sureties will discount condos more heavily than single-family homes, and generally commercial properties are discounted more than residential.
Other things to know.
There are a few other things a client should know when considering whether real estate is the right collateral for them to use in securing a bond.
The sureties will require title reports to ensure the title is clear of any unknown encumbrances, and they also require title insurance, which the client has to pay for.
In states with an unlimited homestead exemption, the surety cannot use the homestead as collateral.
It is important to note that in situations where the surety determines the equity in the property or properties being offered falls short of the amount required to secure the bond, the client does have the option to make up the difference using other forms of collateral such as cash, a letter of credit or assignment of a non-retirement stock portfolio.
When using real estate, the premium rates are much higher than if the client were to secure the bond using cash or a letter of credit, because of the illiquid nature of real estate and the risk the surety takes with changes in the market conditions.
How long does it take?
One of the most important things to be aware of when real estate is being considered is it can take anywhere from 3-8 weeks to get a property in place and bond issued from start to finish. Residential is usually on the shorter end taking between 3 to 5 weeks and commercial can take anywhere from 4 to 8 weeks. The difference mostly has to do with the time it takes to get the appraisal, so in situations where the surety agrees to waive the appraisal it can speed up the turnaround time significantly.
When it comes to using real estate to secure appeal bonds, the most important thing is to start the process early. We encourage attorneys and clients to contact us before the judgment is even entered, because we can do a preliminary evaluation of the client’s properties to determine if they will be sufficient. There is no cost to the client in doing so, and there have been cases where the extra time meant the difference of getting the bond filed before the other party enforced the judgment.
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