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.