10975 S. , Los Angeles

[Linda Kelly]

The Real Estate person was a friend and she was handling both the selling/buying verbally she told me the price was 125,000 then when it was written up the price increased to 170,000.  This is mixed use property commercial in front housing in the back.  The back residential burnt to the ground. real estate person instructed me to give the 1st lien holder 25,000 to hold off foreclosure. tell me that would go towards my down payment. I did that then when i sent them confirmation that the monies had been sent then they tell me that they don't wont to do the deal with me that they have another buyer. I have put alot of time and money into the property. I want it now. how do I get to keep the property? I'm with a non-profit and we don't have that much money but we were turning it into veterans housing. They say that I have to give them the payoff demand. like now!

[Jon Holdman]

IMHO you definitely have been scammed and cheated.  I'll explain below why I say this.  And you absolutely need a lawyer.  You're not going to resolve this without one.

But all is not lost.  The saving grace is this point:

So, you have not paid off this loan.  Rather, you've purchased the note from the former note holder.  You are now the lender and it makes sense that you would be asked for a payoff.  Buying and selling loans (notes) is commonly done, but seems like its NOT what you were expecting and you don't really understand what's going on or what to do next.  So, some education is needed.

Imagine a lender Larry makes a loan to borrower Bob.  The document the loan with a promissory note.  Larry hands Bob a check for the amount borrowed.  Bob starts making payments to Larry on the loan.  This loan is often referred to as a "note" because of the promissory note.  Strictly speaking the promissory note is just the piece of paper, but "note" is very often used to mean the loan itself and not just the paper.

For Bob, this note is a liability.  Its money Bob is going to have to pay out in the future.  For Larry, though, it is an asset.  It is a stream of payments Larry will receive in the future, and those have a very real value.  So, Larry can sell this asset, just as if it was a pile of cash.  Because the cash is coming in the future, the value is less than the total of the payments.  At any point in time, the note has some unpaid balance.  Interest accumulates on that unpaid balance.  For an amortizing note, each payment includes all the interest accumulated since the last payment plus some principal.  For an interest only note only the interest is paid and eventually the principal has to be paid, typically all at once. 

The current value of the note is related to the stream of payments and the current balance.  Typically a note buyer would pay less than the current balance.  A note buyer figures this out by looking at the stream of payments and using the interest rate he desires.  Given those two items the buyer can compute a value he will pay for the note.  The interest rate most note buyers wants is higher than the rate for the loan, so the value is less than the outstanding balance.

This note is a "non performing note".  A performing note is one where the payments are getting made.  You say this should have been paid off in 2009 and wasn't so its non-performing.  Non performing notes are typically worth MUCH less than the outstanding balance.  Depending on the situation, they can be worth 10% of the outstanding balance or less.

So, if Larry wants to sell the note, he can.  And in this case, he did.  Larry (that is, the old lien holder) sold this note to YOU for $52,000.  I say you've been scammed because you didn't understand you were buying a note.  And I suspect $52,000 is the current outstanding balance on the note.  The note is certainly not worth anywhere near its outstanding value, so that's why I say you've been cheated.  I suspect you've been sold a note at a high price and you didn't even realize you were buying.

The good news is that you are now the lender on this property.  In order for the seller to sell it to anyone they will have to pay this note off.  When and if a sale happens you will get some cash back.  If, ultimately, you or your organization manages to buy the property you will take the money out of one pocket to purchase the property and then some of the money will come back to you in the form of the loan payoff.

When you're being asked for a "demand payoff" you're being asked how much money is needed to pay the loan in full.  To figure that out you need to review the note and payment history in detail.  Some amount was owed when the borrower stopped paying.  Interest has been accumulating ever since. The note probably has late payment charges.  It probably also has provisions that allow you to collect attorney fees.  So, I would guess that the amount that you, as the lender, are now owed is the outstanding balance plus interest plus late fees plus attorney fees.  But you will need to review the note carefully to figure this out.  This is why I say you need an attorney.  Given your questions, I don't think you have a good understanding of being a lender, so I don't think you'll be able to accurately figure this out on your own.

Now, I suspect the payoff you're owed is going to be much higher than the $52K you paid.  Even though I also suspect the true value of the note is much less than the $52K you paid I think all that interest and fees will add up to drive the amount owed much higher.  I would play hardball.  With help from an attorney, add up every penny that's owed and give them that total.  The seller or buyer will likely come back and try to negotiation this down.  I absolutely would not go below the total amount you've spent.  If they refuse you can foreclose and take the property to auction.  If nobody bids, you will get the property, which I understand is really your goal.  If someone else does bid, you may be able to bid too.  Or buy it from them.   Or at least get the money you're owed and move onto another property.

For that matter, as the new lien holder of a delinquent note I would have your attorney immediately start the foreclosure process for you. 

I would also immediately do a title search and see if their are any other liens or judgments on this property.  If you're in first position you have a strong position.  If there are other liens in front of you then you may end up being completely screwed and have just paid a $52,000 tuition fee to the school of hard knocks.  If that's the case then you need a lawyer to start filing lawsuits against the other parties involved here.