By Michael Chulak

I am seriously considering investing in short-term notes secured by deeds of trust. What documents should I receive from the mortgage company?

You should receive all of the following:

- A copy of the borrower’s loan application, property appraisal, credit report and any other available documentation that would help you in making an informed investment decision;

- The recorded deed of trust;

- The original promissory note;

- A policy of title insurance that guarantees title;

- A hazard insurance policy with a Loss Payable Endorsement Clause in your favor;

- A recorded assignment of the note and deed of trust;

- The services of an escrow, which will make certain that all of your instructions are fully satisfied before the transaction is completed.

Can I use IRA (Individual Retirement Account) money to invest in notes secured by deeds of trust?

Yes. This is commonly done. There are companies that specialize in setting up and administering “Self-Administered IRAs.” The cost is small compared to the services provided. The administrator will work directly with the mortgage company and escrow to coordinate everything.

My insurance company has recently told me over the phone that my claim is being denied. I’m certain that my policy covers the loss. What should I do?

Immediately request (in writing) that your insurance company put the denial in writing and specifically inform you of all reasons the claim is being denied.

Most insurance companies have an appeal process or administrative review procedure. Promptly request that the denial be reviewed in accordance with the appeal or review procedure.

If your claim is still denied, consult with an attorney that specializes in insurance law and bad faith litigation.

Unfortunately, it is not uncommon for certain insurance companies to act in bad faith.

As a condominium developer, I would like to point out that the present law in California discourages the building of condominiums and other developments with Homeowner Associations. The primary reason is that homeowner associations have up to 10 years to find construction defects and sue developers, architects, engineers and contractors.

Consequently, building homes that are included in a homeowner association have become very expensive due to the high cost of insurance and expensive litigation which, ultimately, is passed on to the consumer.

As much as 50 percent of any financial settlement goes to attorneys and so-called “experts” who find defects. Attorneys who specialize in this field often solicit business from homeowner associations by telling these groups that they will make money at no cost to the association.

For small developers, the current system is very unjust because we are unable to get insurance accept at very high costs. To me, it is quite obvious that these costs are being passed onto the consumer.

In the contracting field, it is customary for the contractor to be responsible for defects for 12 months after completion. Most states in the U.S. have such a law, except California. The existing law — “10 years” — was passed as a result of strong lobbying by trial lawyers in California who spent hundred of thousands of dollars to get the law passed.

What is your response?

First, let me point out that the 10 years within which homeowner associations can sue a developer applies only to hidden defects. These are defects that a person could not reasonably discover such as the failure of a developer to insert fire blocks inside walls. Defects that are reasonably discoverable have a limitation of three or four years, depending on the claim.

Lawyers specializing in protecting consumers would never advise homeowner groups that they could make money-suing developers. Even if an association prevails in court on every issue, the association must pay expert fees, legal fees and other costs, which are rarely fully recoverable. The fact is that defective construction costs homeowners money. Homeowners don’t make money when their building is defected.

You claim that the system is unfair and against developers. This is not true; in fact, the building industry association strongly supported the recently enacted civil code Section 1375. This law is the most pro- developer law ever approved by the Legislature in the history of the state. It makes suing a developer for construction defects more difficult, more time-consuming and more expensive.

You state that the cost of litigation is increasing the cost of housing, which is the fault of trial lawyers. The fact is, if developers built buildings without material defects or voluntarily repaired any defects there would be no need for litigation. Defects are the cause of litigation, not lawyers.

When someone dies in a fire because fire blocks were left out of buildings or buildings slide down a slope because of defective soil preparation, a trial lawyer is the only person an association of homeowners can count on to protect their rights.

Michael T. Chulak is the founder of Michael T. Chulak & Associates in Agoura Hills. Questions can be sent to info@MTCLaw.com.