Legal Issue with owner financing on 25 Units in Kansas

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Legal Issue with owner financing on 25 Units in Kansas

Justin Garrett
Rental Property Investor · Hays, KS · Member since 2016 · 30 posts · 21 votes

Hello,

In a bind here looking on getting other's thoughts, and maybe an excellent Real Estate lawyer in Kansas.

I will start with a bit of backstory. I found some apartments while at home in Kansas on leave. I am currently stationed overseas in Europe. The properties were a value add and need a lot of work to ensure they were up to what I would call suitable standards (something I would want to live in). I negotiated with the seller to do an owner financing with 10% down, and the owner carries the note for 20 years at a 4.5% interest with a balloon at ten years. Long story short, I purchased 25 units last month with owner financing. Unfortunately, during our financing agreement, the owner never disclosed he held a mortgage on the property.

However, when the title company conducted its search, they found a loan on the property. I requested that the bank make the loan assumable, and if the seller defaulted, I would assume the loan and no longer be legally required to fulfill my agreement with him. However, he denied so I stated I would not purchase without the loan being paid off. As I am overseas, I was not as closing, and the original ALTA commitment from the title company under the requirements stated the loan would be released. However, the title company, by the direction of the seller or seller's agent, had this ALTA document altered the day before closing to have the loan placed on the exception page. My broker and transaction agent were told at closing by the seller that the loan was paid off in full. I come to find out yesterday the seller has not paid off his loan. I know some of this is on me because it did end up on the paperwork from the title company as an exception and did not need to be released; however, again, I wasn't at closing, and the seller verbally stated he had paid the loan off. My broker has contacted the bank, and the loan was confirmed not paid (yes, he should have done that before closing).

My question is, what happens if he defaults on the loan that is not assumable and I now have equitable interest in the properties?

If he were to get foreclosed on would I still be required to continue to pay in the agreed on portion of the our owner financing on the properties?

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Wayne Brooks
Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
5y

@Justin Garrett This is not uncommon, this is how a “wrap around” mortgage is done...that’s what you have.  No one typically expects the seller to come out of pocket and pay this loan off prior to closing. You should have your loan with your seller handled by a loan Servicing Company, $40-$50/mo.  You make your payments to them, they pay the underlying loan and forward the balance left over to the seller.  Otherwise, yes you have a risk of the seller not paying the underlying mtg. You both likely also have some risk of the loan being called due since title transferred.  But no, if the seller stops making his payments, he is in default and tou don’t have to make payments, but you have a huge problem as his lender will foreclose if you can’t pay them off.

Try and force the seller into using a servicer for your loan payments.

@Chad U. any other ideas?

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  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    5y

    @Justin Garrett This is not uncommon, this is how a “wrap around” mortgage is done...that’s what you have.  No one typically expects the seller to come out of pocket and pay this loan off prior to closing. You should have your loan with your seller handled by a loan Servicing Company, $40-$50/mo.  You make your payments to them, they pay the underlying loan and forward the balance left over to the seller.  Otherwise, yes you have a risk of the seller not paying the underlying mtg. You both likely also have some risk of the loan being called due since title transferred.  But no, if the seller stops making his payments, he is in default and tou don’t have to make payments, but you have a huge problem as his lender will foreclose if you can’t pay them off.

    Try and force the seller into using a servicer for your loan payments.

    @Chad U. any other ideas?

    3Reply
  • Justin Garrett
    OP
    Rental Property Investor · Hays, KS · Member since 2016 · 30 posts · 21 votes
    5y

    @Wayne Brooks Thank you for the feedback. The "wrap around" mortgage is what tried to have completed once it was found that the seller had the loan on the property but the seller refused. He then stated he had paid it off the mortgage before closing. I also went back through the commercial real estate contract and found the below. There was no mention of liens on the property in the agreement.

    19. DELIVERY OF THE DEED:

    A. On or before the Closing Date, SELLER shall execute and deliver a warranty deed and all other documents and funds reasonably necessary to complete the closing of this Contract. The warranty deed shall convey a marketable fee simple title to the Property free and clear of all liens and encumbrances to the BUYER, except as provided otherwise in this Contract.

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  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    5y

    @Justin Garrett Well, you Do have wrap around mtg now, no matter what you call it.  Since you Did close under these conditions, I suggest you find a local real estate attorney and let him help you work this out so you’re better protected.

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  • Chad U.
    Investor · Boca Raton, FL · Member since 2012 · 1k+ posts · 1k+ votes
    5y

    @Justin Garrett @Wayne Brooks

    Sorry to hear about your predicament.  What Wayne suggested about getting a servicer to collect your payments is a good idea, however will be up to the Seller to setup and allow the servicer to direct the payments to his loan.  In a couple of wraps I've been involved with, where we held the mortgage in 1st position, I as the lender insisted it setup this way.  

    In any event, what the seller did is commit fraud and contravened the purchase and sale agreement.  So it depends if you can arrange the payment structure with the servicer and want to stay in this deal.  Otherwise, I think you have a case to get out of this deal but will need to hire an attorney to file suit against the Seller for breach of contract and committing fraud.  

    1Reply
  • Justin Garrett
    OP
    Rental Property Investor · Hays, KS · Member since 2016 · 30 posts · 21 votes
    4y

    Update: I found a lawyer who stated I had a solid case to bring against the seller. Again this isn't how I wanted to handle this. I had sent the seller an email stating I wanted it handled at the lowest possible level; however, he felt otherwise. The lawyer conducted calls with my will real estate agent and the bank's vice president who held the properties' loan. They then drafted a letter stating the properties needed to be paid off or take legal action, and four days later, I received a letter from the seller's lawyer stating the loan was paid off. This was followed by an email from the seller saying he wanted all future conversations to be at the lowest possible level.

    Thank you, everyone, for your help and guidance in this situation.

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