Adverse Possession

Adverse possession is a legal doctrine under which a person who occupies someone else's real property for a specified period of time — without permission and under certain conditions — can acquire legal title to that property. The doctrine exists in every U.S. state, though the specific requirements and statutory periods vary significantly. For mortgage note investors, adverse possession is a collateral risk that becomes relevant when a borrower has abandoned a property and a third party begins occupying or using it.

Elements of Adverse Possession

To succeed in an adverse possession claim, the occupant must typically prove that their possession was:

All elements must be present simultaneously for the entire statutory period. Missing any one of them defeats the claim.

Statutory Periods by State

The required period of continuous possession varies widely:

Some states impose additional requirements — such as payment of property taxes during the statutory period or possession under "color of title" (a document that appears to convey ownership but is legally defective). These requirements vary and can significantly affect whether a claim succeeds.

Why Note Investors Should Care

Adverse possession claims against properties securing your mortgage notes are uncommon, but they are not impossible — particularly when a property has been vacant for years. The risk profile looks like this:

• Long-delinquent loans with vacant collateral — a note that has been non-performing for a decade on a property the borrower abandoned years ago is the classic setup for an adverse possession scenario. If no one is monitoring the property, a third party may move in and begin establishing the elements of a claim.
• Rural and semi-rural properties — properties with less neighborhood visibility and less frequent code enforcement are more susceptible.
• Properties without regular inspections — if neither the borrower, the servicer, nor the investor has inspected the property in years, an occupant could be well into the statutory period before anyone notices.

An adverse possession claim, if successful, would extinguish the borrower's ownership interest — and with it, the lien that secures your note. This is the worst-case scenario: your collateral disappears.

How to Protect Your Collateral

The defenses against adverse possession are straightforward and should be part of every note investor's property monitoring process:

1. Order regular property inspections. A periodic drive-by or interior inspection — even annually — demonstrates that someone is monitoring the property and interrupts the "continuous" element of any potential claim.
2. Secure vacant properties. Changing locks, posting "No Trespassing" signs, and boarding openings makes unauthorized entry more difficult and creates evidence that the property is not truly abandoned.
3. Initiate foreclosure on abandoned properties. Do not let non-performing loans with vacant collateral sit indefinitely. Filing a foreclosure action reasserts the lien holder's interest and typically disrupts any adverse possession timeline.
4. Monitor property tax payments. If someone other than the borrower is paying property taxes on the collateral, investigate immediately. In some states, tax payment by the claimant is a prerequisite for adverse possession — and in all states, it is a red flag.
5. Check title before acquisition. During due diligence, a title search or O&E report may reveal a lis pendens or other filing related to an adverse possession claim. This is a significant finding that should factor into your bid or result in passing on the asset.

Adverse Possession vs. Trespass

Trespass and adverse possession are legally distinct. A trespasser enters property without permission, but does not meet the requirements for adverse possession — typically because the occupation is not continuous, not open, or has not persisted for the full statutory period. Trespassers can be removed through law enforcement or civil action without any risk to the property's title.

An adverse possession claimant, by contrast, is asserting a legal right to ownership. Once the statutory requirements are met, the claimant can file a quiet title action in court to formalize their ownership. At that point, removal requires a legal defense — not simply a call to the police.

The takeaway for note investors is simple: do not let properties securing your notes sit unmonitored for extended periods. Regular inspections and proactive property management are low-cost insurance against a risk that could eliminate your collateral entirely.