Seller has a mortgage, but bank didnt record it at deeds office! seller wants to pocket their proceeds, advice?

Question

So, im under contract to buy a duplex for $68k, actually nearing the end of the contract period.

its kinda turned into a hairy mess. Heres the key notes:

- Title company found a $10k judgement against the seller which is tied to the property.

- Seller has a 59k mortgage, after all is said and done he would end up having to bring approx. $5k to closing due to judgement & misc. He is not willing to pay anything, sounds like he is financially stretched and has messed up his credit in recent years. (commented to me that he would let it go into foreclosure before paying)

- I go to the deeds office with the seller (we've become somewhat friendly acquaintances) and find out there is no filed mortgage on the property. This blows the sellers mind because he is actively paying on a mortgage. In Douglas county the Deeds Office is the one stop shop for mortgage filings, if there is a mortgage on a property thats the place it is filed. I call the Title company and they confirm, although the seller told them he has a mortgage, they did not find a mortgage on the property either.

- Seller got his lawyer involved to attempt to negotiate down the 10k judgement with the creditor (a defaulted LOC apparently) so he could atleast walk away at closing with nothing out of pocket free and clear. No progress was able to be made.

- Seller is now wanting to still sell without paying off the mortgage, pocket the $50k+ cash after paying the 10k judgement and default on the mortgage.

- Title company contacted his bank for a loan payoff amount (confirmed $59k), it does in fact show this property as the security.

- I asked if the title company would still insure the title without paying off the note, they hesitantly said yes, then also said they wouldnt recommend buying without paying it off.

- im concerned about his bank possibly coming after me later with some document they found somehow, maybe a messed up filing at the deeds office. Or something and me now either getting forclosed on by them or me now owing that additional 59k)

what the hell do i do? run? allow the transaction?

@Owen D.

Ned Carey · Answer

I am NOT a lawyer and this is not to be considered legal advice for you specific situation.

Here is my laypersons understanding of the situation.

NO the property is not security without a recorded mortgage (or deed of trust.)  It may have intended to be so, but it is not.

What we commonly call a mortgage is actually two documents; a Note and the recorded mortgage or deed of trust.  The note is what obligates the borrower to repay. The recorded mortgage is what makes the property collateral for the note.

You are not party to either document and have no obligation under either document. The lender cannot come after you (shy of some type of fraud, but that is not what we are talking about here).  If you bought the property and there WAS a recorded mortgage then the lender still could not come after you but they could foreclose on the property.

Keep in mind that the seller is still obligated to the lender via the NOTE. But that is a contractual obligation between the seller and the lender.

Your concern about a misfiled mortgage or deed of trust is legitimate, but that is what title insurance is for. To be safe the title company can ask the lender to send a copy of the deed of trust stamped with the liber and folio.  I would be surprised if the title company hasn't already done that. Shame on them if they haven't.

One potential easy solution is to tell the lender "We are going through with this sale. Since you have no recorded mortgage the title company is not going to send you any proceeds  unless you agree to a short sale and accept  $X as payment in full"

I think the seller is in a strong negotiating position with the lender. Talk to an attorney for legal advice.

Jennifer Pereira · Answer

Everyone is saying "get title insurance", but my understanding is that the policy hasn't been issued yet.  Title insurance is typically a nominal premium because claims are infrequent, but if I were that company facing a high probability of loss, I'd think twice about underwriting the policy.  They aren't required to.

Rob Beland · Answer

I think this is the reason for title insurance. If there is no recorded mortgage and after a title search that is confirmed, it is what it is. The company will write the policy and if there are any issues in the future, you are insured. The guy gets to walk away from his mortgage but he still has to come up with the money to satisfy the judgement. The bank that did not record the mortgage is out of luck from your perspective but the Seller could be facing a lawsuit of some sort. I'm not an attorney but I'd be willing to bet that since you contacted the mortgage company they are spinning their wheels pretty fast to get this resolved.

John T. · Answer

Account Closed

STOP! Go see a lawyer before you close on this property.

The mortgage is valid between your Seller (present owner) and the Bank whether it is recorded or not. If the mortgage was filed for record then you would have “constructive” knowledge of the mortgage whether you actually knew it or not. However, based on your post, it appears that you have “actual” knowledge of the mortgage. Therefore, if you buy the property, the mortgage may be a valid lien against the property.

Nebraska Revised Statutes

Section 76-238. Deeds and other instruments; recording; when effective as notice; possession of real estate; not effective as notice; when.

(1) Except as otherwise provided in sections 76-3413 to 76-3415, all deeds, mortgages, and other instruments of writing which are required to be or which under the laws of this state may be recorded, shall take effect and be in force from and after the time of delivering such instruments to the register of deeds for recording, and not before, as to all creditors and subsequent purchasers in good faith without notice.  All such instruments are void as to all creditors and subsequent purchasers without notice whose deeds, mortgages, or other instruments are recorded prior to such instruments.  However, such instruments are valid between the parties to the instrument.

DISCLAIMER:  This post does not constitute legal advice.  This advises you to seek the legal opinion of an attorney licensed to practice law in the state in which the property is located.

Matthew Paul · Answer

It sounds like the seller has basically an loan similar in essence to a credit card advance . Yes he owes the money but can sell the house because there is no lien on it .  But I am sure the note holder has attorneys on retainer that would go after the house after it was sold . And if the title insurance company finds an out , you are fighting his battle on your dime.

Account Closed · Answer

@Isaac Essex Is the mortgage with a national lender? just curious

Account Closed · Answer

@Steven Picker JP Morgan Chase

Account Closed · Answer

@Ryan  D. when we found out about the 10k lien and him having to bring 5k to closing (which he was refusing to do) I kept looking to see if I was comfortable paying the extra 5k just so he could leave without paying and be willing to do the deal. But to be honest, i truly did make him my absolute highest and best offer. anything higher and no question I would walk.

I had to go get approved for a 30 yr conventional mortgage to make it make sense when normally I would only be interested in the typical shorter  commercial loans and keeping them in my LLC.

Account Closed · Answer

@Rob Beland Thats what I keep thinking - thats what title insurance is for.

I just have this feeling that something bad could happen to me down the road and theirs some loophole in title insurance or something - (i know thats an inexperienced statement). The sketchy'ness of the seller regarding how he is willing and wanting to not pay the mortgage which he knows he took out isnt helping me feel better.

Jeffrey Vandagriff · Answer

Seems to me like its up to the title company to get the money into the right hands.  Like what @Chris Simmons was saying, I can't see the title company giving the guy any money at closing, and if you aren't willing to put in another $5k then you have two options. Negotiate down the note, or walk. Oh unless perhaps he has a couple of sea doos or a motorcycle he can give you to justify bringing the extra cash to the table. Might see if he has anything to sweeten the pot. I have a friend who got his bass boat that way.

Seller has a mortgage, but bank didnt record it at deeds office! seller wants to pocket their proceeds, advice?

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