Big Trouble Over Subject-To Deal Gone Bad (long) - Posted by John Doe

Posted by Frank Chin on January 26, 2002 at 06:54:21:

Hi JohnBoy:

I recall a recent post by Bronchick talking about doing “no money down” doesn’t means “no cash” and this situation is a good illustration.

“Subject to’s” had been mentioned as a way for people with NO MONEY and HORRIBLE CREDIT to get into real estate. But what this means is that some who already had problems dicipling himself in paying bills suddenly takes responsibility for taking someone else’s hard earned money, the T/B’s money, and pay a Note holder religiously.

It’s almost like asking a recovering alcoholic to hold your drink for a few minutes while you go to the john.

What it means is, when he takes the T/B’s money, he’s not going to get that car of his fixed, do another deal, or pay for groceries. Then, what if the T/B is a week or two behind, or get a lawyer as in this case.

Frank Chin

Big Trouble Over Subject-To Deal Gone Bad (long) - Posted by John Doe

Posted by John Doe on January 26, 2002 at 24:54:37:

First, sorry for posting anonymously. However, these details aren’t ones I want floating around the Internet forever associated with my name, so I hope you’ll understand.

I took a property subject to an existing first mortgage a little over a year ago. I used Bronchick’s forms, taking title in a land trust using an out of state trustee, then later having the trustee appoint me co-trustee with power of management.

The loan was current when I took it over. The elderly seller said she just wanted to be rid of the property. The mortgage was held by a private party. I contacted him, explained what we wanted to do, and he agreed, saying that as long as he got paid, he didn’t care.

After a few months, I found some tenant buyers who signed a one year lease option, paid $1000 option consideration and moved in. So far so good.

The TBers have paid their rents on time, and have four months left in their option term. They say they want to buy, have met with a mortgage broker but don’t have a loan committment yet.

The cash flow on this property is minimal, but there’s a profit of about $15k on the back end. Unfortunately, some major cash flow problems unrelated to this property caused me to be about two weeks late with the mortgage payments on a couple occasions.

The first I knew of a problem was about a week ago when I got a frantic call from the TBers, saying the mortgage holder had shown up at the property, told them he “owned it”, the payments were “way behind”, he was going to foreclose and they’d have to deal with him.

They couldn’t get ahold of me immediately, so they called a lawyer…who apparently saw them the same day, looked over the paperwork, told them he didn’t know if “this trust stuff” was legitimate and he couldn’t tell if “your landlord even owns the property.” In short, he put a lot of doubts in their minds about whether I was either trying to scam them, or was about to be foreclosed on.

Meanwhile, their rent payment was due the next day. The lawyer told them to pay him, and he would hold it in escrow “until all this gets cleared up.” Needless to say, if I DON’T get their rent, the mortgage isn’t going to get paid, then it WILL be in default.

Well, I tried calling the mortgage holder, but he wouldn’t talk to me…said, “Call my lawyer.” The next day, I got letters from both the TBer’s lawyer wanting to know what’s going on, AND the mortgage holder’s lawyer, saying they are planning to foreclose based on violation of the DOS.

I wrote back to the mortgagee’s lawer, cited the Garn-St. Germain act and told him he couldn’t foreclose based on transfer of title into a trust (I don’t think he knows - or at least can’t prove - the beneficial interest was transferred). He wrote back today and said too bad, they’re foreclosing anyway, and they don’t care that the loan payments are current. I also faxed a letter to the TBer’s lawyer, briefly explained how title was taken in a trust, subject-to, etc., reassured him that the payments were current and that the mortgagee has no grounds for foreclosure. No response at all from him yet.

It takes at least 6 months to foreclose in my state, probably more. Since the TBers have only four months remaining, I suggested they try to speed up obtaining a loan so they can exercise their option right away. But they’re scared stiff, ticked at me and won’t do anything until their lawyer says to.

Meanwhile, my seller is already furious with me, and doesn’t even know the whole story yet, that the mortgage holder definitely intends to foreclose. Apparently the old geezer was offered the property back in lieu of foreclosure before the seller ever called me, he refused, but now has had second thoughts. Of course, his lawyer denies that the mortgagee ever consented to the title transfer, or even knew about it, which isn’t true, but his agreement was oral, not in writing.

Yes, I’m meeting with my own lawyer next week. But he’s not terribly knowledgeable about trusts either, since his only experience with land trusts is my deals using Bronchick’s materials.

Oh, and to make matters worse, I haven’t been able to pay the 2001 tax bills yet on this property. I thought it was OK because the municipalities don’t foreclose for taxes until they’re three years delinquent, but the mortgagee’s lawyer also cited that as grounds for foreclosure.

I know I need way more help than I can get here, but what would others do in my position? Both the TBer’s lawyer and the mortgagee’s lawyer are clamoring to see the trust agreement, and for obvious reasons, I don’t want to show it to either of them. At this point, they don’t know the main trustee’s name or address, and I don’t want them to, if I can avoid it.

Meanwhile, my position is that the TBer’s are delinquent on their rent, which is being held by the lawyer. Their lease doesn’t provide for payment of their rent to anyone but me, or allow it to be “held in escrow.” If I start eviction proceedings against them, it’s only going to make them angrier at me, I’m afraid, and then I’ll end up having to try to explain this whole mess to a judge when they contest their eviction. How am I going to get their lawyer to release the rent, without revealing the whole trust to him?

Ideally, the TBers would get their loan right away, exercise their option, buy the place and put an end to this whole disaster. But, they’re paralyzed with fear, though they say they still badly want to buy. If they don’t have any new credit issues, they should be able to qualify for a loan.

Any other ideas how I can correct this situation, or at least stall a foreclosure if one is filed, until the TBers can get financing?

Any thoughts are appreciated, since this can’t get a whole lot worse.

“John Doe”

Big Trouble Over Subject-To Deal Gone Bad (long) - Posted by JohnBoy

Posted by JohnBoy on January 26, 2002 at 02:20:24:

I’m not an attorney and the following is just my opinion. You NEED to get an attorney involved to represent you on this.

First and foremost, YOU brought this problem on yourself by not making the payment on time and using that money for something else! You must always keep your deals separate and have them stand on their own. NEVER rob from Paul to pay Peter! The other problem is the taxes not being paid. That IS grounds to foreclose! It doesn’t matter that you may have 3 years to pay the tax assessor’s office. If you don’t pay them ON TIME then the lender can foreclose!

If you bring everything current, including the taxes then it’s unlikely the lender could go through with the foreclosure. Usually there are state laws that allow the buyer to cure the loan if they’re in default before the foreclosure goes through. You need to find out what your state laws are pertaining to this. Also, the lender usually is require to send you proper written notice when in default before they can proceed with anything. Have you been served any notices by the lender?

You also need to read the mortgage agreement to see what it says. Is this an actual mortgage the seller is carrying or was this a land contract deal you took over?

Since you have told the lender about this up front and he was informed, and the fact that he has accepted the payments all along on this, then he may have a weak case as far as claiming the DOSC was violated.

The other fact that the lender has went directly to your T/Ber’s may be grounds for tortuous interference with your agreement between you and your T/Ber’s. The mortgage agreement may allow the lender to collect payments directly from any tenants in the event you default on the payments if the property is rented, but you need to read the mortgage agreement to see if it says anything about that. You may want to send a certified letter demanding the lender stop and desist from any further contact with your tenants or you will file suit for tortuous interference. Check with your attorney first on this!

The other thing you might consider informing your T/Ber’s is that if they don’t pay their rent on time then that could destroy their chances of getting a loan being so close to exercising their option! Their lender is going to require seeing cancelled checks and/or bank statements to show proof that they made the rent payments on time! Holding an uncashed check or putting cash into an unauthorized escrow account with their attorney, without your written consent isn’t going to cut it as far as their lender will be concerned. (I think)

Another thing to consider is agreeing to set up a 3rd party escrow to handle the timely payments on this for the rest of their L/O term. The T/Ber’s can send the rent to the escrow account and the escrow account can send the payment directly to the lender and forward any difference to you.

Why haven’t you been keeping up on the taxes? Do you collect enough rent to cover the mortgage and taxes on this deal? If so, what did you do with the money then?

You also need to find out about the laws regarding selling a property in a trust. Some states require the seller to disclose the names of all beneficiaries of the trust when selling a property on contract. Whether that applies in your state or not, or whether it applies to L/O’s or not, I couldn’t say.

You don’t have to show the attorney the trust agreement if you don’t want to. They will have to take you to court to force you into revealing that. Although you may be required to disclose the names of the beneficiaries depending on the laws in your state pertaining to land trusts.

As long as you have properly placed this into a trust and transferred the beneficial interest, then you shouldn’t have any problems there as to who owns the property. The trust owns the property, period! The only other issue is whether your state laws require any disclosure of the beneficiaries to your buyer or not.

You NEED to get a good lawyer involved with this, NOW, so you can have someone qualified to represent your interest! You have no one to blame but yourself for allowing this to get stirred up by not keeping the payments and taxes current.

Get a good lawyer on this now!