Seller financed 2nd will not accept payment

15 Replies

Hi everyone, in April 2020 we purchased a 4-unit property in Los Angeles where the seller financed a 2nd mortgage. The seller stayed in the property as our tenant after close. We are attempting to pay off the 2nd, which is due in March of 2022, so we can refinance the first mortgage. However, the lender (seller/private party) will not provide a payoff statement and said they do not want to accept payment because they "will get murdered in taxes and want the extra income". Extra income being our interest payment. There is no prepayment penalty per the note. One of our attorney's told us she cannot "just decide" not to allow pay off and I am waiting to hear back from another attorney. Has anyone experience this? 

""will get murdered in taxes and want the extra income". Extra income being our interest payment." How do they owe taxes on getting their principal back? It's not income. Losing the interest on the payment is something...Maybe offer them the option of rolling the loan into the next property you buy, giving them an option to refinance an aggregate first for you (well - maybe not if they are weird), or offering them a variation on the "cash for keys" kind of thing....maybe proposing something like, "we are sorry you are losing some income, you can get paid off eventually through escrow on the refinance, or we could pay you off now with an extra small fee for your inconvenience and loss of income from the prior owners' actions "....maybe something like an hour or two worth of legal fees.

@Stephanie Trevizo , that is pretty crazy. Talk to an office that handles closings either a law office or title/abstract company. You might be able to work around it by escrowing an estimated mortgage payoff. Someone that handles closings can ask their underlying title insurance company if that would be satisfactory. 

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@Jim OConnell if it was a taxable sale (like a rental property) they will be taxed on the return of their principle because that’s when the profits of that portion of the sale will be recognized.

BUT, you could explain to them they are only delaying the taxes on the Jan, Feb, March payments. Since they will obviously owe taxes on every payment made through Dec 31st this year anyway. 

I still don’t think they have a leg to stand on. BUT, if you schedule the refinance to close on Jan 1st/2nd then the seller wouldn’t face any extra taxes. Are these HUGE payments? Doesn’t seem like the taxes would be much but if it’s in California he could get murdered in taxes. :-). 

As mentioned above he could just agree to let the new financing be in first position and keep his loan in second. The refinancing bank should be able to help with this as I’ve done it before. (To me detriment unfortunately but that’s another story.)

Originally posted by @Stephanie Trevizo :

Hi everyone, in April 2020 we purchased a 4-unit property in Los Angeles where the seller financed a 2nd mortgage. The seller stayed in the property as our tenant after close. We are attempting to pay off the 2nd, which is due in March of 2022, so we can refinance the first mortgage. However, the lender (seller/private party) will not provide a payoff statement and said they do not want to accept payment because they "will get murdered in taxes and want the extra income". Extra income being our interest payment. There is no prepayment penalty per the note. One of our attorney's told us she cannot "just decide" not to allow pay off and I am waiting to hear back from another attorney. Has anyone experience this? 

I think what your seller is really looking for is cash flow. All they have to do is subordinate the 1st. That means the first is allowed to be paid off, a new loan is in place and docs are prepared to place the seller in 2nd position. It's a common transaction in investing.

Originally posted by @Kevin Sobilo :

@Stephanie Trevizo, that is pretty crazy. Talk to an office that handles closings either a law office or title/abstract company. You might be able to work around it by escrowing an estimated mortgage payoff. Someone that handles closings can ask their underlying title insurance company if that would be satisfactory. 

This is a good route, thanks for the suggestion. Our attorney says she legally has to accept payment but we suspect she’ll stall as long as she can so we will definitely reach out to a title and escrow officer  

Originally posted by @Jim OConnell :

""will get murdered in taxes and want the extra income". Extra income being our interest payment." How do they owe taxes on getting their principal back? It's not income. Losing the interest on the payment is something...Maybe offer them the option of rolling the loan into the next property you buy, giving them an option to refinance an aggregate first for you (well - maybe not if they are weird), or offering them a variation on the "cash for keys" kind of thing....maybe proposing something like, "we are sorry you are losing some income, you can get paid off eventually through escrow on the refinance, or we could pay you off now with an extra small fee for your inconvenience and loss of income from the prior owners' actions "....maybe something like an hour or two worth of legal fees.

Thanks for the feed back, we do have other properties they could transfer the debt to. They definitely are “weird” though, they had an attorney serve us with a legal notice that we need to hire someone to take out their trash and claiming we are trying to evict them, which was news to us. There’s been a number of things that make us want to end the relationship unfortunately.

Originally posted by @Bill Brandt :

@Jim OConnell if it was a taxable sale (like a rental property) they will be taxed on the return of their principle because that’s when the profits of that portion of the sale will be recognized.

BUT, you could explain to them they are only delaying the taxes on the Jan, Feb, March payments. Since they will obviously owe taxes on every payment made through Dec 31st this year anyway. 

I still don’t think they have a leg to stand on. BUT, if you schedule the refinance to close on Jan 1st/2nd then the seller wouldn’t face any extra taxes. Are these HUGE payments? Doesn’t seem like the taxes would be much but if it’s in California he could get murdered in taxes. :-). 

As mentioned above he could just agree to let the new financing be in first position and keep his loan in second. The refinancing bank should be able to help with this as I’ve done it before. (To me detriment unfortunately but that’s another story.)

You’re right, we heard back from our attorney, they don’t have a leg to stand on. Good to know the financing bank should be able to help, I’ll definitely ask. 

@Stephanie Trevizo if you’re refinancing into a 30 year perm loan, there’s a good chance they WONT allow 2nd position financing, at least that’s what I’ve seen almost exclusively in my experience. Private loans are much more flexible and allow them. I assume the Seller recorded their note and deed of trust? This will show up for all refi banks and likely be a preclose requirement. So I would definitely work towards paying them off and ending that relationship. If your attorney has reviewed the paperwork and agrees there are no prepayment clauses, then I would proceed with “legal action” - at least a letter from your attorney stating the situation. Possibly be open to an extra “fee” for early payoff just to get the deal done.

Originally posted by @Kevin Sobilo :

@Stephanie Trevizo , that is pretty crazy. Talk to an office that handles closings either a law office or title/abstract company. You might be able to work around it by escrowing an estimated mortgage payoff. Someone that handles closings can ask their underlying title insurance company if that would be satisfactory. 

I doubt a title insurer will allow its policy to be issued w/o a sat of the 2nd in hand or an exception for it in the policy especially now with knowledge the lender is refusing to provide one.  Title insurers are in the risk avoidance business not risk assumption.

As you stated, you have loan docs which stipulate there is no pre-payment penalty, as such, the note holder can not legally deny acceptance of payoff, no matter their reasonings. They have no legal right to do so and your attorney may want to remind them that creating any delays or attempts to refuse payoff will be met my legal action, including attorney's fees. SO if they hate their tax implications, they will certainly hate legal fees even more.

This is NOT to be construed as legal advice as I am not a licensed attorney in any state. Please consult with your attorney on this, everything above is just opinions of non attorneys (although I agree with them).

@Stephanie Trevizo your attorney said they cannot "just decide" to not allow pay off, yet they did. Your attorneys job is to find find solutions, not just say how things should or should not be. The attorney can likely draft a letter and copy it to their attorney. They could also take action in court. In the end, it may be easier to just wait until March 2022. 

Originally posted by @Ben Stoodley :

@Stephanie Trevizo if you’re refinancing into a 30 year perm loan, there’s a good chance they WONT allow 2nd position financing, at least that’s what I’ve seen almost exclusively in my experience. Private loans are much more flexible and allow them. I assume the Seller recorded their note and deed of trust? This will show up for all refi banks and likely be a preclose requirement. So I would definitely work towards paying them off and ending that relationship. If your attorney has reviewed the paperwork and agrees there are no prepayment clauses, then I would proceed with “legal action” - at least a letter from your attorney stating the situation. Possibly be open to an extra “fee” for early payoff just to get the deal done.

That's not been my experience.  I've subordinated plenty of 2nds on 30 yr fixed.

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It appears that a failure to provide a written payoff demand statement to the borrower (entitled person) within 21 days of receipt by the lender (beneficiary) of a written demand for the payoff subjects the lender to $300 fine PLUS actual damages. Actual damages would be pretty easy to calculate, IMO.

Read the below statute but especially section (e)(4).

https://codes.findlaw.com/ca/c...

Thanks for the feedback everyone, it's greatly appreciated! It definitely helped us get closer to a solution. The are now cooperating and we will hopefully resolve it all soon.