First wholesale deal down in flames

[Jim Viens]

What a way to start the new year (and my REI endeavors). Wow...where do I begin? Last summer, as a beginning wholeseller, I started sending out handwritten yellow letters to a neighborhood near me that looked like it had good investment potential. I received a callback from a lady who, after describing the situation she was in, I decided a deal wasn't going to work out for. As it turns out she gave my information to her son's fiancee who had just inherited a house (in the same neighborhood) from her deceased mother. Of course I arranged the walkthrough, worked up my rehab estimate, made an offer and got it under contract for $27,500. My familiarity with the area gave me confidence in my conservative ARV of $80k and I lined up a buyer. I did a walk-through with the buyer and his contractor (whose numbers were within about $2k of mine...yay me!) and arranged a purchase price of $34k. Seller assured me up front there were no title issues or liens and we just had to wait for the attorney to finish the process to get title in her name. After a long, painful process of going back and forth with the attorney (turns out she originally tried to do all the paperwork with the courthouse without an attorney and fouled everything up) we finally got a final decree from the court putting title in the seller's name. I run everything to the title company, open escrow and order title. 

Here's where the fun REALLY begins.

Title report uncovers not only an open mortgage for $60k...but TWO open judgments and a third pending suit against the seller to the state for child support. Ouch. So I have a sit-down with my buyer and explain the situation to him. Then I had a "come to Jesus" discussion with the seller. At first she tried to say the judgments weren't her, but the title company confirmed it was her by the names of the children named in the case. Now (still claiming she knows nothing about the judgments) she's saying she'll have to get an attorney to straighten it out for her. Here is an excerpt of an email I sent her:

"...we need to prepare ourselves for some definite possibilities that may come of the issues on the title work. There is the mortgage (which is a big deal) but there's also the current and pending judgments from the State. The title company was able to verify that they are definitely yours. They total about $8,000 plus whatever comes from the currently open pending case. These are a much bigger deal than the mortgage, actually, because there's no way to get them off the title other than paying them off. Couple this with the fact that the mortgage may still be valid and we have a deal-breaker situation. Worst-case scenario we have a $60k+ mortgage and $8k of judgments on the house. The house cannot be sold under those conditions..the bank will foreclose and take the house. If the judgments get paid and all that's left is the mortgage I could work out a short-sale with the bank (where they would agree to take less than what's owed on the house as payment in full). But then you would get no money out of the deal at all...but you wouldn't have to deal with the house either. Both of these are very real possibilities at this point and I'm guessing that all the open liens on the house are valid and this deal likely won't go through. At best you may be able to work something out with the State regarding the judgments to get them cleared off the title but I don't think the State is going to budge. I know this is a lot to have dropped in your lap but these are the facts of the situation. Let me know if and how you would like to proceed."

Another thing I'm kicking myself about is that those judgments never would have attached had the attorney actually filed a Probate case rather than a Quiet Title. I then could have purchased the house on a short-sale from the estate of the deceased owner.

This is the mess I'm in after over three months of trying to get this FIRST deal to close. NOW I'm out the cost of the title report that I ordered AND I've got an ethical dilemma on my hands. At the outset I told the attorney I'd make sure his fees were put on the HUD-1 and he'd be paid from the proceeds of the sale at closing (he was concerned the seller wouldn't pay him). Now that it appears there won't be a closing I'm not sure, since I gave him that assurance, if I am on the hook for his $700 fee for handling the Quiet Title suit. Updside is...this hasn't scared me off. I'm still moving on and will be putting a bid on a HUD house in that neighborhood for under 30% of market value that is pretty clean and doesn't need much work.

So, thanks for letting me vent guys! Onward and Upward!