MY SELLER HAS DECLARED BANKRUPTCY !!!! - Posted by Wilton

Real Estate Investing Real Estate Financing
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Posted by Nate on March 12, 2001 at 20:14:23:

My guess is, if you have a RECORDED option to purchase the property, any deed (for example deeding it back to the lender) would, in fact, be subject to that option. Check with your local real estate attorney to be sure.

I know that when I take an option to buy a property, it is from “[Name of the Seller], their heirs, successors and assigns…” which certainly would seem to include the lender if the property is deeded back to them instead of being foreclosed upon.

NT

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MY SELLER HAS DECLARED BANKRUPTCY !!! - Posted by Wilton

Posted by Wilton on March 11, 2001 at 10:59:42:

When I buy a property subject to or Lease option, and fine a tenant buyer and install him in the house, and then the original seller files BANKRUPTCY, What will happen regarding this property? Will the lender recover the property via the bankruptcy court? If so, Do I not have a problem regarding the TENENT BUYER.!!! I made a contract with this person, Does he not have recourse on me because I cannot honor the L.O. contract entered into between Him and me.? Maybe the odds are that …seller will NOT declare BANKRUPTCY, but, im certainly interested in knowing what will be the outcome IF HE DOES.!!!
I have been in this business for years, but never buying with subject to or lease options. I would like to add to my tool box this great method of buying, however, I think it is wise to look before you leap.
I posted this same question some days ago and did not receive any replies. I will appreciate any clarification to this question. Thanks in advance. Wilton

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Re: MY SELLER HAS DECLARED BANKRUPTCY !!! - Posted by Wilton

Posted by Wilton on March 12, 2001 at 11:13:42:

MANY THANKS FOR ALL THE GOOD INFORMATION.
I can always depend on this site for valuable help.
Wilton

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This looks like a job for PACMAN :wink: - Posted by gwtx

Posted by gwtx on March 11, 2001 at 15:16:03:

Quite candidly, that is one of the benifits that Bill Gatten says that his PacTrust does eliminate. That dastardly villian, Bankruptcy.

I won’t try to go into all the details though. I will let one of PacMan’s crime fighting gang do that! Or you could go search the archives if you like.

gary

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Re: MY SELLER HAS DECLARED BANKRUPTCY !!! - Posted by JPiper

Posted by JPiper on March 11, 2001 at 15:07:33:

This is a complicated question?and has a large number of possibilities and outcomes depending on exactly all the facts in the specific circumstance. There is going to be no way answer your question. You need to spend some time in thought, and with an attorney.

But first point?..when you enter into a contract you then obligate yourself to perform according to the contract. So?if you granted a tenant an option on a property, you have the obligation to deliver the deed to the property when and if they exercise their option. Your failure to deliver a deed upon the tenant?s exercise would mean that 1) you had breached the contract and 2) that the tenant could sue you for performance and/or damages.

On a ?subject to? transaction YOU own the property. So the property itself is not an asset in a bankruptcy (unless the property is deemed to have been fraudulently conveyed, another set of complications). However, the loan is probably going to be included, and in fact must be included. If not, the bankruptcy runs the risk of being thrown out if the other creditors discover that they are being treated unfairly. The idea here is that the borrower will extinguish his obligation under the loan. In doing this, it will become clear to the lender that the property has been transferred. And at this point, they will have an option as to continue with a loan that is being paid by a ?non-borrower?, to have you formally assume the loan, or to accelerate the loan under the due on sale provisions. Their possible acceleration is a possible risk to these transactions ALWAYS, not just in a bankruptcy.

This same transaction ?bought? by you as a lease/option and then sandwich lease/optioned to a tenant/buyer is a different scenario completely. In this tranaction, the seller is still the owner, the loan is still in their name. If they file bankruptcy, then the goal is to extinguish their obligation under the loan, but the asset (house) is now a part of the bankruptcy as well. Your right to the property via your option and lease, now become claims under the bankruptcy. This is what we call ?a mess?. A judge is now going to make some decisions, and clearly this is not where you want to be considering the fact that you are obligated to deliver a deed. I would say that in this scenario you would want a performance mortgage recorded to secure your option?giving you a secured interest in the property.

I had an interesting one here last year. I don?t normally sandwich lease properties?but I did one in a low equity situation with a very low rate on the mortgage. In the process of due diligence, I called the lender Bank of America. I hear the phone go through so various transfers after I called the automated system and keyed in the account number. Next thing that happens is that the phone is answered ?Bankruptcy department?. For once in my life I was absolutely speechless! I sputtered around for a minute?and then finally hung up?lol. My next call was to check on whether a bankruptcy had been filed?yep, it had.

I ended up doing this deal anyway, against the advice of my attorney by the way. When I sandwiched it to the next guy, I disclosed the bankruptcy filing. I agreed to refund their option money if I were unable to deliver title because of the bankruptcy, and they agreed to release me from any obligation if it came down to it.

I had a performance mortgage executed, but I decided not to record it until the bankruptcy was discharged. It?s now recorded.

JPiper

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Re: MY SELLER HAS DECLARED BANKRUPTCY !!! - Posted by JohnBoy

Posted by JohnBoy on March 11, 2001 at 11:37:53:

I’ve asked about this very thing several times in the past. The best answer that I got was that if the payments have been made on time and the loan is current that the lender would most likely do nothing since someone is paying on the loan. I’ve also been told to just tell the seller filing the BK to not file against the lender on his BK since you are making the payments. I personally don’t see that ever happening unless the seller has a real idiot for an attorney! My opinion is that if the seller is filing a BK, then their attorney will advise them to list and file against EVERY CREDITOR, regardless! They can’t come back and file again in a couple of years should their buyer end up defaulting on THEIR LOAN! Especially on a deal that was taken over “subject to”. They no longer have ANY legal interest in the property! They are however, still liable for the loan. Think about it! If this were YOU, would file against the lender if you had no legal interest in the property any more, but were still liable on the loan??? They would have to be a complete idiot not too! That leaves you stuck dealing with the lender. Will they call the loan and actually foreclose??? I wouldn’t know since I haven’t been in that position yet. The theory I get is that the lender probably wouldn’t, but I have yet to hear from someone that has actually been put in that position and what happened.

If you’re in a position to get a new loan then you have nothing to worry about since worst case you would just refi and pay off the underlying loan or get the original lender to write you a new loan against the property.

The real question becomes, would a lender go through the expense of a foreclosure, getting the property back even though all the payments are being made, and then deal with the payments being stopped why they foreclose and risk a big loss in the end just to get what ever they can out of it??? Don’t know…guess it depends on the particular lender at the time!

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Re: This looks like a job for PACMAN :wink: - Posted by Bud Branstetter

Posted by Bud Branstetter on March 12, 2001 at 24:27:28:

It is a crime to continue doing business the old way with CFD, LO and standard subject to deals. I don’t think Bill would say that it eliminates the bankruptcy. What is the situation is that title has already transferred to the trustee. The owner has sold a beneficial interest in the trust. Same as conventional, almost. The owner has kept an interest in the trust and the real property has not been sold. The court can attach his interest in the trust. Any money that he might get in the future is up for grabs. What they are not likely to do is force the sale or try to negate the trust. The lender is still getting his payments, the real property has not been sold so there is no violation of their DOS clause. Maybe the lender will make history by going after this one. I doubt that the lender will care but I sure feel safer than trying to hide something. Divorce, IRS would be similar. The beneficial interest is personal property. What reason would there be to try and undo that contract for the personal property?

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Re: MY SELLER HAS DECLARED BANKRUPTCY !!! - Posted by JPiper

Posted by JPiper on March 11, 2001 at 14:31:06:

Just thought I’d mention that if a creditor is not included in the bankruptcy, the bankruptcy could get thrown out of court. I believe that this falls under the “fraudulent bankruptcy” guidelines. The point is that creditors are treated equally under bankruptcy…which may not happen if one is not included.

JPiper

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Re: MY SELLER HAS DECLARED BANKRUPTCY !!! - Posted by B.L.Renfrow

Posted by B.L.Renfrow on March 11, 2001 at 13:00:30:

Having just dealt with this on a sandwich L/O…it wasn’t a pretty picture.

I tried to persuade my seller to not include the loan on the subject property. Of course, as you indicate, his attorney, not being a complete fool, advised him otherwise.

To make matters worse, the lender on this deal was a private individual. My seller practically tripped over himself to rush to deed the property back to the lender, leaving me standing there in the cold. It was only by sheer luck my T/Ber’s lease and option happened to expire at the same time this fiasco developed, or I would have had a big problem on my hands.

I attempted to get the private note holder to discount for an early payoff instead of taking the property back, but he refused. Although my T/Ber wanted to exercise their option, they had not yet qualified for a loan, and wanted to extend their option another year, which I was prepared to do until the BK occurred (I had two years left on my option with the seller). But the speed with which things progressed once the seller decided to proceed, left inadequate time to get the buyer financed.

As it stands, the private note-holder is threatening me with legal action – though he has no claim. I’m sure I’d be hearing from the T/Ber’s attorney, had their option not mercifully expired when it did. Who knows…I’ll probably hear from their lawyer anyway.

I’m not sure whether it would have made a difference had I recorded a performance mortgage on this property, but it’s irrelevant now.

Regardless, I agree it’s definitely a concern when one is doing these types of deals.

Brian (NY)

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Re: MY SELLER HAS DECLARED BANKRUPTCY !!! - Posted by JohnBoy

Posted by JohnBoy on March 11, 2001 at 14:35:09:

Would that be grounds to just have the case thrown out, or would that just mean if you failed to list a creditor then that creditor still has full recourse against you as a debtor and is not discharged from you owing the debt?

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Re: MY SELLER HAS DECLARED BANKRUPTCY !!! - Posted by JohnBoy

Posted by JohnBoy on March 11, 2001 at 13:19:37:

What kind of a case would the private note holder have against you? You have a legal binding option on the property. My guess is (since I’m not an attorney) is that if you had a performance mortgage recorded against the property you could foreclose yourself. Of course you would have to pay off the first to protect your interest on your equitable interest on the option. The note holder couldn’t do squat against you except foreclose himself to get the property back just like any other lender would have to do! You have NO liability to the note holder since you never signed on the note. His only recourse is against the borrower and foreclosing on the property. Has nothing to do with you personally. At least that is the way I understand it.

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Re: MY SELLER HAS DECLARED BANKRUPTCY !!! - Posted by B.L.Renfrow

Posted by B.L.Renfrow on March 11, 2001 at 13:36:08:

He wouldn’t have a case. He’s simply blowing smoke. This guy is a multi-millionaire businessman who likes to consider himself a RE investor. But he knows no creative strategies at all. What he does is buy from desperate sellers at about 50% of FMV for cash, then sells with owner financing. Which, of course, is fine. But he, and the broker he employs full-time, are right from the, “You can’t do that kinda stuff…that’s illegal…” school. We (me, the note-holder and his RE broker) had a rather unpleasant conference call, in which the note holder and broker kept insisting it was “illegal” for me to give an option on a property I didn’t own, and I obviously must have defrauded my T/Ber. Of course, I told them they were wrong and to feel free to check it out with their attorney, which they assured me, they would.

My thinking was that if I’d had a performance mortgage recorded, I could have simply kept the first current (it was never in arrears) and then foreclosed to exercise my option, since the performance mortgage would have prevented the seller from deeding the property back to the lender in lieu of foreclosure.

Brian (NY)

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Re: MY SELLER HAS DECLARED BANKRUPTCY !!! - Posted by JohnBoy

Posted by JohnBoy on March 11, 2001 at 13:48:05:

My understanding is that when the first accepts a deed in lieu of foreclosure, they are no longer a first lien holder, they become the new legal OWNER, period! This means that since you have a valid option on the property that was signed by the original owner, the new owner would have to honor that option. As it stands right now, YOU still have a valid option on that property that the new owner would have to honor should you elect to exercise it at the price that was given to you! You may want to go down and record your option agreement! Then call Mr. Note Holder and his Big Broker and ask them if they would be interested in buying your option from you! LOL

I believe you would have a valid case on this, but double check this with a qualified attorney! Just because the seller deeded his interest over to someone else, it doesn’t automatically release your interest in the property! You still have a valid option and don’t think their is squat the NEW OWNER can do about it! He’s no longer a lien holder, he’s now THE owner once he accepted the deed in lieu of foreclosure! He SHOULD have dealt with you first to get you to release your interest on the option before accepting the deed. Once he did that, he lost his position as a lien holder!!! At least that is how this was explained to me.

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Re: MY SELLER HAS DECLARED BANKRUPTCY !!! - Posted by B.L.Renfrow

Posted by B.L.Renfrow on March 11, 2001 at 16:22:30:

You raise an interesting point which I hadn’t considered. I assumed (yeah, I know) that since my lease and option were with the seller, when his interest in the property was forfeited, mine was extinguished as well. Since the lien holder is no longer the lien holder, but rather the owner, you may be correct.

Sounds like it’s time for a conversation with my attorney.

Brian (NY)

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Re: MY SELLER HAS DECLARED BANKRUPTCY !!! - Posted by JohnBoy

Posted by JohnBoy on March 11, 2001 at 16:39:10:

It would be the same as a seller selling a property with a tenant that has a lease with 6 months to go. You buy the property you are stuck honoring the balance of the lease with the tenant. The tenant doesn’t just lose their lease automatically because his landlord sold the property!

Also, remember all those quit claim deeds being sold pertaining to the Brooklyn Bridge???

In this case, your seller deeded over his interest in the property, but that doesn’t automatically release you from the interest you have in the property. The new owner couldn’t sell this until he deals with you on this option OR until the option expiries! Of course, he could probably file for eviction if your not paying rent on the property under your L/O agreement. But until he serves you proper notice you should retain the right to reinstate that if you wanted too! On the other hand, your agreement was never with him and unless your seller assigned his L/O agreement over to him, he may not have any recourse against you even though you may have recourse against him on exercising your option! Getting with your attorney would be a good idea!

You can sure have some fun with this though!

Say, Mr. X Note Holder aka NEW OWNER…I have a LEGAL option here to buy this property for X amount. The property is currently worth this amount, X amount MORE than my option price AND I have TWO more years to exercise my RIGHT to buy it at THIS price! I figure about $5k in todays dollars would compensate me enough to RELEASE my RIGHT to this option if you where to pay this TODAY! Otherwise I just think I’ll sit on this thing for the two years and decide then whether I want to buy this or not! Appreciation can be a beautiful thing you know!!! LOL