Property deed question
 

I've loaned some money to an acquaintance who is now in a position that he can't make the monthly payments. In lieu of payment, he has agreed to grant me a percentage of an investment property.

I want to protect my interests and get a notarized paper that guarantees my percentage, but don't want to record it unless I come to believe he's trying to screw me out of my money. I don't want to show a recorded encumbrance on the property because he's currently trying to sell it. Sort of an insurance policy.

I'm not really clear on the different types of deeds out there. What kind of deed, or other paper, do I need him to fill out and notarize?

To have a security interest in the property, you'd have to record a trust deed.

Otherwise, he could sell the property at any time, without telling you, and the buyer would take it free and clear of any interest you would claim against it.

So, basically, if he already owes you money under some kind of a note or agreement, and you simply do another, unrecorded note where he grants you an interest in the property, it is a bit of insurance, but not really much.

BTW, he should not object to you recording a trust deed against the property. That does NOTHING to prevent him from selling it, i.e., it does not make the property harder to sell in any way.

Without getting a lot more details from you, the best you can get is general advice. In general, the plan you have would result in an agreement that would be worth almost the paper it was printed on.

The deal is that if you don't record your interest you have almost no rights as to that piece of property. Anyone who obtained an interest in the property, such as mortgages or mechanics liens or judgment liens, and recorded the lien would take priority over you, even if their interest came after you, because they recorded their interest and you didn't. They could forclose on the property, take all the value of their interest in it, and you might be left with nothing.

If you're going to secure the debt with property record the lien. Spend the $500 on a lawyer to do it right. If you're not interested in having a public record of the debt, just take an unsecured note. Of course, that's pretty much what you have now. Can you take title to his car or something?

Well you can enter into a private loan agreement with your friend, and even have that notarized, but that will not give you any meaningful security. You would still have to sue on the agreement to get your money - and, even if you eventually get judgment in your favour, you would still have to enforce the judgment.

It's far preferable for you to just register a lien or caveat against the property. That way you would be paid out from the proceeds of any sale. No buyer should have a problem with such an encumberance, because it will not affect the money they pay, and discharging the encumberance occurs as a matter of course when the sales transaction is completed.

You can do this (legal note and UCC lien) for $299 from CircleLending (see https://circlelending.com/handshakeplus/products_hpOver_features.asp ) or you might be able to do it yourself through legalzoom or similar.

The agreement we reached, since I'm not aching to get the money back right now anyway, is that I would get a certain percentage interest in the property. If it sells for an amount that my percentage would result in less than I am owed, then he'd pay me what he owes. If my share results in more than I am owed, then I get the percentage. So I don't really want to record a lien for a specific amount of money in the event that he sells for a higher price somewhere down the line.

I think this is more like a partnership than a lien. I don't want to do anything to complicate title that might disrupt his current financing.

Is it possible to enter a lien for a percentage interest?

A recorded lien against the property is generally going to have to be in a dollar amount.

You could set up a partnership, wherein you are a partner, and then transfer the property to the partnership. But that's way more complicated then simply recording a deed of trust against the property.

You are resistant to record a deed of trust against the property, but have not given any good reasons for not doing it. It will not disrupt any potential sale of the property, doesn't really "complicate" title and won't disrupt his current financing (it would be junior to his current financing). It wouldn't even necessarily disrupt *future* financing, as you could, if you wanted, simply subordinate your lien to any future lender.

The lien/trust deed really is no big deal, and is the easiest way to fully protect yourself (assuming there currently is equity in the property, and enough equity to survive any downturn in prices that may occur).

If you don't want to record a deed of trust, you could have him just deed an undivided interest in the property and record it. For example, "For value received, the receipt and sufficiency of which is hereby acknowleged, John deadbeat does hereby convey and warrant unto Buddy Lender an undivided 1/4 interest in the following described propert: ......"


That way when its time to sell, your name will be on the proceeds check and you will have to sign the deed of conveyance before buyer can get clear title.

Whether a deed or deed of trust, if you don't record it he can sell the property and skip out.

Down here you would be added to the LLC as a representative. If there is no corporation set up for the land deal then you will need to be added to the deed as stated previously.

Here's a question related (this gets me thinking):

Say someone gets foreclosed on, but they have one or more liens on the property. Wouldn't the holder of the mortgage(s) get paid out first and then any lienholders out of what's left?

Because the amount likely to be netted from a foreclosure would almost certainly be less than the $$$ amount necessary to cover the mortgage(s) AND the amount of any liens, who'd be standing holding the empty bag(s)? My guess would be any lienholders (plus the mortgage lenders would likely have to eat a partial payment on their original loan, etc.)

Far as I know there's no direct recourse against the former property owner for this - or is there?

Reason I'm asking is I want to understand the details of foreclosures a lot better. These are going to be the new "gold mine" of opportunities in the coming months/years. . .

PoP - "Gold digger" :)

:)

I prefer "opportunist", but I suppose "gold digger" works. . .

"Opportunist" in CA = "Gold Digger" everywhere else...works for me :)

Jeff, I became better acquainted with this issue recently, when we found that a house we had planned to buy had an IRS lien on it. We didn't buy, but I did some research and asked a lot of questions.

In a forclosure, the bank assumes not only the deed to the property, but all claims against it. Therefore, in order for the bank to own the property free and clear they have to pay all liens first. This is of course necessary for the bank to sell the property.

If you are talking sale instead of forclosure, the lienholder is the last to be paid, because the liens must be taken care of in order for the property to close. When there is not enough equity in the property to pay off the loan, there will still be a balance that has to be paid by the borrower.

Another case is a property facing forclosure, with an intersted buyer. In this case, sometimes the bank will do a short sale, where they actually write off a portion of the principal. This allows the liens to be paid out of equity, and the bank still gets SOMETHING. Also, they aren't left trying to collect money from a borrower who obviously was not paying anyway. Often times the bank still makes out OK, because of the large amount of interest that has been paid in the first few years of the loan. They really only lose money on paper.

Forclosures are a tricky deal, and vary from state to state. Around here, most are auction format, with the bank placing the first bid for the amount of principal owed. In cases where this is not realistic, the bank may bid less and take a loss. Buyers have to be careful though, because the original borrower has up to one year to essentially take back the property by paying their loan up to current. If this happens, you are screwed. Many guys that flip houses buy the homeowner's rights from them, so they immediately own it with no worries. Talk to someone that does this often, or a RE lawyer, they can give you the particulars for CA.

You should consult with an attorney if you want a Grand Deed giving you an ownership percentage. I would think you could assume liabilities if you became a part-owner. Also, the lender could have an issue with a change in title and possibly accelerate the note.

Why make things complicated where you could come out ahead or behind? Just write up a note for the current balance including any past-due interest and secure it with a Deed of Trust and record it. Why would you want to become a co-owner and partner with someone who doesn't seem like a good risk? If he flakes on the payments to the property, you could wind up losing all your loan and perhaps more.

The "liability" risks was the first thing that popped into my mind too when you mentioned an ownership percentage.

I don't know what sort of property this is, but if someone is injured or killed on the property and a resulting lawsuit finds the property owners to be negligent in some way, I think you'd be on the hook as an owner.

If the guy has equity in the property and is trying to sell it, why doesn't he just put a price on it so it will move in a reasonable period of time, then he pays you back with the proceeds from the sale? It seems "convoluted" to make you a part owner while he's trying to sell.