Creative Deal Structure: Upfront Payment, Second Lien, and Permit-Contingent Payout

[Satya Polavarapu]

I’m exploring a potential deal and wanted to get some input from folks who’ve done similar creative structures.

Here’s the high-level idea :

Total agreed purchase price: $400K plus $150K due upon approval of permits to build a larger building on a site that currently has an income-earning smaller property.  Location: Wilimington, Delaware if that matters. 

Upfront payment at contract signing: $200K (seller’s existing loan is also about $200K).

The plan:

• I’d be in a second lien position behind the bank.

• Contract gives me 45 days for due diligence; I can back out during this period and have my $200K returned.

• If I proceed after due diligence, I’d make the final $200K payment, seller pays off their $200K loan, and I take title at closing. I start the permitting process and upon approval, will pay the seller the $150K. 

The twist:
If I don’t proceed after due diligence and the seller fails to repay my $200K upfront payment within the agreed timeframe, I would pay off the bank’s $200K loan and take ownership without contest. In that case, the seller would also forfeit the potential $150K contingent payment tied to permits. This reduces their incentive to default on repaying me just to trigger the bank payoff route.

My main questions:

1. Has anyone structured something like this where title can transfer quickly and without a prolonged foreclosure process if the seller defaults on repaying the initial amount?

2. What creative (but legal) mechanisms have you seen to protect the buyer’s interest in this kind of setup?

I’ve spoken with one attorney who said it’s possible, but I’d like real-world feedback from investors who’ve actually executed something similar — especially around complexity, enforceability, and state-specific considerations.

[Ken M.]

Quote from @Satya Polavarapu:

I’m exploring a potential deal and wanted to get some input from folks who’ve done similar creative structures.

Here’s the high-level idea :

Total agreed purchase price: $400K plus $150K due upon approval of permits to build a larger building on a site that currently has an income-earning smaller property.  Location: Wilimington, Delaware if that matters. 

Upfront payment at contract signing: $200K (seller’s existing loan is also about $200K).

The plan:

• I’d be in a second lien position behind the bank.

• Contract gives me 45 days for due diligence; I can back out during this period and have my $200K returned.

• If I proceed after due diligence, I’d make the final $200K payment, seller pays off their $200K loan, and I take title at closing. I start the permitting process and upon approval, will pay the seller the $150K. 

The twist:
If I don’t proceed after due diligence and the seller fails to repay my $200K upfront payment within the agreed timeframe, I would pay off the bank’s $200K loan and take ownership without contest. In that case, the seller would also forfeit the potential $150K contingent payment tied to permits. This reduces their incentive to default on repaying me just to trigger the bank payoff route.

My main questions:

1. Has anyone structured something like this where title can transfer quickly and without a prolonged foreclosure process if the seller defaults on repaying the initial amount?

2. What creative (but legal) mechanisms have you seen to protect the buyer’s interest in this kind of setup?

I’ve spoken with one attorney who said it’s possible, but I’d like real-world feedback from investors who’ve actually executed something similar — especially around complexity, enforceability, and state-specific considerations.

your comment: "I’ve spoken with one attorney who said it’s possible"

Yes, it's possible. He's the attorney looking at the fees to correct your problem when this blows up. ;-)
Yes it's possible to jump out of an airplane without a parachute, too. Does that mean hitting the ground without a parachute is smart?

There are developers on BP that may have a different view point than me, but I don't  know how you get around the risk of doing things this way or even why it would make sense.

You have a very complicated offer. Upfront payments, in second lien position?????   45 days???
Very short for that kind of risk. 

Your comment: "I would pay off the bank’s $200K loan and take ownership without contest"
How do you propose to do that???? Paying off someone's mortgage doesn't give you ownership. Plan on at least 6 months to do a foreclosure
https://www.lscd.com/node/431/guide-foreclosure-delaware

Is the building used for a home?

So let's see, a lawsuit to enforce, can take a year and a half and someone on BP with a lot of experience said it took them 3 years to win theirs. There is no guarantee of winning by the  way. 
 

Lawsuits run from $25,000 to $125,000 in legal fees. You don't get that back if you win.

Your assumption is that you give a seller a large sum of money and then you try to take it back? He now has the money to fight you in court. And he will. 

Why not just give him an EMD of $5,000 and risk that instead of all this other stuff?