Ray @lcorn: Opinion about Mike Oldfield Post? - Posted by Stacy (AZ)

Posted by Stacy (AZ) on January 17, 2000 at 22:25:15:

I knew I could retype the whole www.creonline.com/wwwmessageboard/...oh forget it. You know what I mean. This is a time saver, thanks. It seems so obvious now.

Stacy

Ray @lcorn: Opinion about Mike Oldfield Post? - Posted by Stacy (AZ)

Posted by Stacy (AZ) on January 17, 2000 at 14:16:54:

Ray, I read your recent posts regarding bankruptcies, and in particular I found post 54430.html most helpful. Your statement that “bankruptcy laws are some of the most bizarre and hard to understand legislation that exists today” was certainly supported by your post.

On April 19, 1999, Mike Oldfield posted a brief explanation of a deal he had just completed. I was intrigued, and printed the article to remind myself to learn more about this technique. However, after reading your posts, I wonder if it’s a lot more complicated than I first thought. Since I can’t get to the article in the archives, I’ll retype it below. I’d appreciate your opinion about this technique, and if you think the time needed for an investor to learn enough to pursue these safely is worth the potential return. Anyone else, please feel free to comment as well.

Stacy


BANKRUPTCY

A few months ago we purchased a 1st mortgage with a $120,000 balance for $40,000 from the bank.

THEY DID NOT WANT TO FORECLOSE OR WAIT FOR THE BANKRUPTCY TRUSTEE TO DISCHARGE HIS INTEREST.

Before we offered the 40 grand. We told the seller that we wanted to buy the first mortgage from the bank and we would like clear title to the property one way or another. We explained to the owner that we would rather give him $5000 cash in a brown paper bag in the back of a smoke filled room for clear title because it would save us the headache of foreclosure and we would begin operating the property right away. HE WENT FOR IT.

Cash in exchange for clear title. We also paid $21,000 in back taxes. The net effect on this deal is that we bought a property appraised as $150,000 for $66K.

In bankruptcy you must report all your assets to the court so they can divvy it up among your creditors. Do you suppose he reported this $5000 cash exchange? YEAH RIGHT! We are not obligated to tell the court. Only he is.

We don’t know NUTHIN.

Outline of strategy

1 Buy bad paper from the bank

2 Give debtor cash for clear title

3 laugh all the way back to bank at step1

Mike Oldfield rides again!

Good Luck Creative Collegues

Mike Oldfield

I miss Mike… wonder where he went? - Posted by ray@lcorn

Posted by ray@lcorn on January 17, 2000 at 17:16:04:

Stacy,

From reading information given in the post, I can’t see how the deal could have taken place.

The most important thing to understand is that once a debtor enters bankruptcy, the disposition of the assets and liabilities is no longer his call. The court must approve any change of status in either. The whole purpose of the filing is to gather the debtors assets, total his liabilities, and provide for a pro rata sharing of any equity that exists among the various creditors according to class.

There is no problem in buying the mortgage from the bank while the property is in bankruptcy. You then become the successor in interest, and have all the rights of the original lienholder, SUBJECT TO THE JURISDICTION OF THE BANKRUPTCY COURT. That means that you cannot foreclose without the permission of the court. You can participate in the disposition of the case, and you will be paid to the extent of the allowed claim upon sale of the assets, or in accordance with some type of payment plan approved by the court, depending on what chapter the case was filed under. (i.e. Chapters 7, 11, 12, 13)

In a Chapter 7 for example, the property would be sold, the admin and legal fees of the bankruptcy would be paid first, the tax claims second, the secured debt (you) third, then any junior liens, then the unsecured creditors. You will make the profit, but it will take time. You cannot “operate the property right away.”

Or, after buying the bank’s lien, you could petition the court to take the collateral for the note balance plus the unpaid taxes. In a case where there were no other claims, that MAY fly. But the court will look long and hard at the value of the collateral before turning it over to you. If there are other claims, then they have rights to the equity, however small.

The debtor also cannot transfer the property without permission of the court. The debtor has no way to deliver clear title without the approval of the court. He certainly could take the $5000, and maybe even risk not reporting it, but he couldn’t deliver clear title without the court’s approval. So Mike either wasted his money, or it didn’t go down how he said it did.

Now having said that, there is one way that the deal could have happened, but it is really stretching the bounds of credibility to think one would relate the details of a deal and leave this much out.

What would have to happen is this:

  1. Debtor files bankruptcy.
  2. Buyer buys note from bank.
  3. Debtor makes deal with buyer to transfer property upon satisfaction of back taxes and payment of $5,000.
  4. Debtor moves to have bankruptcy dismissed.
  5. Buyer pays taxes, transfers property with deed-in-lieu of foreclosure, and takes his chances on whether there are any other judgements or claims attached to property.

(A motion for dismissal can be requested at any time before discharge by the debtor. The court is bound to (must) grant the motion. The net effect is as if the case had never been filed. The automatic stay is lifted, and creditors may resume whatever collection activities are appropriate.)

In this scenario, the debtor has walked away from maybe $9000 in equity, and opened himself to the actions of all his other creditors. Nothing illegal has happened, only that the bank has discounted a note, and the debtor sold a property for some amount of cash over the mortgage. Though I wonder if the bank would have an actionable suit for fraud if they heard about it.

My question is, assuming it was a valid and necessary bankruptcy filing in the first place, why would the debtor do this? I can understand walking away from the asset, but he would be open to the attacks of all his other creditors. That $5,000 wouldn’t last long.

Further, why would the bank do this? Every bank I know is well aware of the bankruptcy process, and given a simple Chapter 7 filing, would know that it would likely only be a matter of months before they could obtain possession of the collateral. If it were a more complicated Chapter 11, then there are even speedier ways for the bank to recover the collateral. If it is in a Chapter 13, then again it makes no sense for the debtor .

As a strategy to pursue for bargains, this is a part of the market that takes nerves of steel and a solid understanding of the law involved. I have maintained contacts with the attorneys we used in completing our Chapter 11 filings, and from time to time an interesting deal has come along. I can both help out my attorney’s client, and get a good deal in the process. The best way to get in the loop on these deals is to cultivate a relationship with a lawyer that specializes in bankruptcy. You could also monitor bankruptcy filings, there are several services around that do just that. Be VERY careful if trying to structure a deal directly with a debtor. I would ALWAYS have counsel on hand.

ray

One of many ways - Posted by Bud Branstetter

Posted by Bud Branstetter on January 17, 2000 at 16:16:37:

Stacey,

Their are many good deals through bankruptcy court. It is time consuming to go through their records to find a deal. It is hard to do with your day job and I don’t know of a way to teach someone exactly what to look for. You can teach them to retrieve all real property that is being liquidated but then they would miss some deals in reorganizations. Because of the need for cash and the time needed not many are doing it so you would have a leg up their. You may have been able to find the deal through the back taxes approach. The key is not telling the trustee that you are buying the mortgage at a discount. The trustee would see him having little or no equity and nothing for the other creditors to claim. You may have to wait until it is discarged or the trustee allows you to proceed with a foreclosure but by getting the deed signed you negate the need for that and it is just the time it takes to get the court to approve the sale.

The bankruptcy approach is similar to probate in that it takes time to research to find that one gem. If you can hook up with some of the people that do that type of research and get info from them then you are ahead. There just isn’t enough time to do each and every way of making money with real estate. Matching your resources, time and inclinations with one or more will keep you busy.

Re: I miss Mike… wonder where he went? - Posted by Stacy (AZ)

Posted by Stacy (AZ) on January 17, 2000 at 17:32:41:

Thanks, Ray. As usual, you’ve taken personal time to post a well thought-out reply, and I appreciate it.

After I read your previous posts about bankruptcy, I looked over Mike’s post, which I had printed and hung next to my computer to remind me to investigate the strategy. Certain things in Mike’s post no longer made sense to me. I don’t want to imply Mike was wrong, only that he may have left out some important facts…for brevity.

I owe you one. If you don’t drink, maybe I’ll just toss a MH Park your way.

Stacy

Re: A few good methods… - Posted by Stacy (AZ)

Posted by Stacy (AZ) on January 18, 2000 at 01:23:55:

Bud, as always, good feedback. The main thing I took from your reply was that “there isn’t enough time” to learn every way to make a deal. And your last sentence summed it up.

You’re right.

Thanks-

Stacy

Re: I miss Mike… wonder where he went? - Posted by IdahoBob

Posted by IdahoBob on January 17, 2000 at 21:17:06:

Hi Stacy good post.
Just want to pass something on for your future and others here use. In the address field at the top of my browser I noticed that your post number is 55231. I went up and typed the old post number you gave in that part of the address and the system did bring up this old post to my screen. Hope this helps