Posted by ScottS on October 02, 2003 at 15:35:23:
Speaking from a purely protection standpoint the Performance Mortgage is much stronger then the Memorandum. Some investors have found it difficult to get a seller to agree to sign Performance Mortgage because of the very fact that is does create the lien. I have not had that experience.
If you record the memorandum there is a danger of the title company missing it during the title search. How likely? I would guess unless it was done only a few days prior, they would find it. The one I use seems to do quite well.
At best though the memorandum only puts a cloud on the title and is enough to make people start asking questions. The Memorandum gives you no powers should you be trying to protect your interest. By that I mean your only strategy may be a suit for specific performance.
In addition, the performance mortgage can be used as a sort of asset protection device. Meaning, if the home is highly leveraged from the start (low equity) and you put a second in place that has the value of another $15K or so, this may in fact put the home upside down. The point is, should the seller get a judgement against them for some reason there may be no equity to force sale of the home in order to satisfy the judgement. Not to mention there may not be a lawsuit anyways if the attorney for the other party looks and sees there is nothing to get in the form of equity.
Another point, if the seller does declare bankruptcy, I think it would be quite easy to get a release from the stay imposed by the BK proceedings, barring fraudulent transfer issues. Of course if you buy the home today on a L/O knowing the seller may be decalring BK in a few months you might be in over your head. Then again, you might not.
Also, the other reason many gurus say record the memorandum might be twofold. There might be some sort of tax issue at the county level based on recording the Deed of trust. I actually think the reason they say use it is because they have been advising this for a long time and Bill Bronchick is the one who has taught the method for the last few years and for them to jump on the “Record a Performance Mortgage” bandwagon would admit to a shortfall in their system and there’s too much pride for that. Now, that second reason is purely speculation on my part, but an opinion I hold close.
I hope this helps,