Re: I’m in the middle… - Posted by Jack
Posted by Jack on July 29, 2001 at 09:35:07:
Here are just 2 scenarios?there are many others.
Lets say you are TRandle Real Estate Investor (sorry Tim) and you have been rocking along for a few years and you have done about 50 subject to deals and xx number of creative deals… along comes a mass layoff in your town, an local or national economic down turn, whatever (lets call it the “event”)…and in month 1 of the event you note that 10% of your deals missed the monthly payment. That?s 5 payments at $1,000.00 each???
Well a few of them catch up (say 1/2)and along comes month 2…5% more go delinquent well now you have 2 1/2 from month 1 that are 2 months past due and 5 from month 2 that are 1 month past due…the numbers add up very quickly. Now at 45 days you are at 8k and climbing?..
To save the day, you decide to give the properties with problems back to the original seller…after all that is the right thing to do and you are not liable right???..and you will account for and repay him all the money that you collected…all your profit from the deal. All the Buyer’s downpayment(s) or option $$. All the monthly spreads…And you are upfront about it. You made $XXXX.XX. BTW, in order to get a full release of liability from someone you must disclose fully to them otherwise the release is not fully effective. So if they know how much you made, then and only then can the seller release you from liability to the seller. (Not to the federally insured mortgage holder, but more about that later.) When you show them you made XXXX.XX they will want all or part of it.
Well, the seller (if you can find him) looks at that and says one of two things:
#1) "You made $XXXX.XX on my property while in your “name”. You have done very well, so catch the payments up and give it back to me.
…a)Problem is…you no longer have the cash to do that. So, fair is fair, you account for the receipts for that property only and disclose to him?Meanwhile…the occupant is not moving out, he has filed BK or he has generally thwarted you attempts to remove him…just for a month or two after you discovered the delinquency.
Can we all agree that now it is not too farfetched to be 3-5 payments down on this one deal?
Well, under our scenario, thats 3-5k per property.
Anyway, you made $$$ on it, true, but you used it, lived on it and most importantly, now during this event, you have several of them going bad at the same time, so any cash you have must go to the title companies, attorneys, accountants to unwrap this mess and don’t forget…you too meanwhile have to keep food on the table.
…b)So, the seller says, give it back and I’ll forget it. But bring it current. So, you fork over 3-5k in payments and get a release and walk away. Or you don?t fork over the bucks, it does not matter at this point.
Lets all remember that the ?event? is preventing several of the occupants from making the payments so likely, since your livelihood is tied to the economy, you have a problem too?
BECAUSE, YOU SEE, YOUR PROBLEM IS NOT JUST NECESSARILY WITH THE SELLER. It is with his mortgage company. You have caused this loss by your actions or even your inaction. You did not screen the occupant, you did not remit the money that you made on the deal to bring the now past due mortgage current?..whatever?even if the property was delinquent when you first bought it and you caught it up and the above happens.
What if the seller keeps the $$$ you paid and elects not to bring it current? It is his choice. After all, he was not keeping the property when you first bought it from him, and now, his credit is hit (again) with a mortgage history delinquency. He lets it go back to his mortgage company.
When he files his taxes and discovers the financial obligation the foreclosure has placed on his tax liability, he is upset and tells the examiner that you are the guy who got him in this mess. And he knows for a fact that you have done it to a few others cause you originally told him the business you are in. And you just recently told him you cant’t pay him cause you have other problems and thats where most all of your funds have gone.
When he goes to finance his next house, his car, whatever, he discovers that the mess you got him into causes his rate to be super high and he places a note in his credit bureau file that you are the guy who ruined his credit…he is not responsible cause he sold it to you and you could not/ did not pay him.
Believe me, he will conveniently leave out the true details. You are the bad guy. After all, you bought the property from him and whatever you did, you stopped paying the notes.
When he goes to his attorney, if you didn?t pay him all the money, his attorney says this transaction is very one sided and he suggests that they sue you for unjust enrichment. After all, you profited from his property and gave him nothing.
When they go to court everyone looses except the attorneys. It will cost you big bucks to defend but most important, it will deplete the balance of your funds and even before the court date, UNDER OATH you will have to tell them about the other similar transactions…all of them… the good ones, the bad ones, all the trusts… Your tax returns, your checkbooks, your phone bills, credit card bills…there is no hiding it.
So now they know about your business and the fact that you have several of these in the same or similar situation. Some you worked out. Some you did not.
Upon getting a court judgment against you for the unconscionable act of profiting from the sellers situation, they begin to realize that they can?t get your assets, cause you have trusts, corporations and you have shielded them cause that?s what you have been trained to do?.then they decide to take other measures. You have never paid the price for what has happened to them in fact, you have not been affected at all.
What do you think they will do?
#2) The seller looks at the situation and says?no?you keep the property, I still have other problems, I filed BK, I am getting a divorce, I can?t afford it today anymore that I could have then, I am sick?whatever. He will not take it back.
So, you fight the occupant, get him out and either resell the property and/or lose it to the mortgage company yourself.
The seller still has the same problems as above. He is not happy. But, it just may take him awhile to figure this out.
You are still to blame. And remember, the problem is not only with the seller, it is with his mortgage company.
So here you are and you have faced all these problems and made them right. But you have only done your part. You can not affect what others do.
When a number of these deals go bad and someone (the Seller, the occupant, the mortgage company) loses money or has been inconvenienced, you could be to blame.
Once the Bell has Rung, You Can Not Unring It.
So, lets think about it this way. A subject to purchase by one of us should only be (if you insist on doing them) a short term (12-24 month) method of acquisition and it should be refinanced by the occupant ASAP. It should contain, at a minimum, 2-3 months contingency and be fully disclosed to the seller. It should be monitored by a third party collection agent and any problems addressed immediately. The prospective occupant must be screened and an exit strategy in writing devised and adhered to.
This guru business of ?just take it back from them and do it again? is full of holes.
Remember, the problem is not just only with the seller, it is with his mortgage company. So the disclosure part of the scenario is only partially protective.
Oh, I forgot?.you are not liable, right???
Don?t get me started