Mention Buying Back My Note To Surviving Beneficiary After This?

Question

I've learned the individual who sold me a 4-plex on owner carry a few years passed away a month ago. The promissory note will transfer to his only child and he wasn't married. He was a fine, personable older fellow but had a habit of sneaking in persons not on a lease as he did with me when he was on a post-sale occupancy agreement for 9 months. He was a likable, lonely guy though these were street-people he took in and who were of the worst character such as drug users. I evicted the first person he brought in and not him, but learned that person was replaced with a former daughter-in-law, who was also a user.

His subsequent landlord of 3 years also learned about bringing in drug users after this fellows passing and stated to the daughter that he had damages of $20K and that the promissory note I now pay to the daughter has value and that he should pursue it for damages - its the only remaining asset of the estate. I don't think he will as dealing with a tenants passing is difficult and I believe his damage numbers were inflated as he did the fix himself over the the last month and can't bill for his time. He indicated he could pursue it but probably wouldn't, in my conversation with him. He had every reason to be upset.

I had gone over to see why the April payment hadn't been deposited and saw the landlords note and number on the door - he had never called me to check references 3 years ago and I would have been in a difficult situation on what to say. Apparently this fellow eventually died of shock after being handcuffed on a drug raid of the people he let in. He lived on life support 3 days and passed in the hospital.

The current landlord brought up the subject of the promissory note being a salable asset to the sole heir, the deceased's daughter. I would like to buy the note as some point and believe it has more value to myself and can pay more than a note wholesaler offering a low price to her if/when she goes to shop it around. I may simply get a notification that the note has been sold though she hasn't started the Colorado process to become Personal Rep and he died without a will, but becoming the PR cab be done quite quickly here and she can sell the note without mention.

I don't think she knows that about $3200 of the payment each month currently is taxable interest income to her -yet- but still a good income while the principle of $1K per month isn't taxable. It was at 5.5% on a 30 year with a ballon at 20 years and all to go to her if he passed at anytime. He insisted he didn't want to pay taxes on an outright sale or pay a Broker. He wanted it specified in the sales contract that that it was to go to her and she got a copy of that contract. A sales contract doesn't transfer title of the note upon his passing, but she is the sole heir anyway.

How can I approach this- I got some real headaches during his tenancy and would like to be the eventual buyer of the note rather than a note trader. I believe its worth more to me than to note wholesalers, etc. The sole heir could sell it in short order as its the sole asset though I see she's about to do quite well on the sale of her own house that is currently under contract.

Apologies for mentioning the dramatic events in addition to the question about the note. That can cloud questions - its been a memorable week.

Chris Seveney · Answer

@Burt L.

Sorry or hear about your loss. Speak to an attorney but I believe the checks should still go to the lender who is deceased. That would then potentially cause her to commence with probate as the banks may not let her cash the checks.

Ned Carey · Answer

@Burt L. your post makes no sense. You talk about subsequent landlords when you have stated YOU are the owner.

Yes you can buy a note from anyone, including a note you are responsible for paying. A promissory note is a "negotiable instrument" and is therefore freely transferable.

Tracy Z. Rewey · Answer

@Burt L. An unusual situation. We have bought quite a few notes from heirs over the years. The main challenge usually surrounds probate/estate issues. You want to be sure that the Assignment of the Mortgage or Deed of Trust will be insurable by a title company. They will usually want to see evidence of who can sign for the estate (Administrator or Executor/Executrix) of the estate. That process can vary by state. The next challenge will be locating the original note so it can be properly endorsed by that same party to follow the Assignment chain. It is also possible the estate will have costs that have to get paid out of the sale of any assets (like the note). You may need to assist this potential seller with finding a good attorney to handle the estate/probate.

In the meantime, you could get an Option Agreement for the Note (Mortgage/DT) signed by the party you think/hope is the sole heir. The suggestion by @Bob E. to pay an option type fee for first right of refusal could also entice the potential seller. You might need to look at that as "gambling money" rather than "grocery money" as it could be tough to enforce before probate is complete (or even after...). I've had deals where we have recorded an Option Agreement so it showed on title we had a potential interest while the title issues were worked out. You just have to be sure to have an attorney review to be sure that is appropriate for your state and situation.

Dwayne Poster · Answer

Less story more fact

Tracy Z. Rewey · Answer

Excellent point Chris. You want to believe the heir will do the right thing and yet people do some crazy things. Plus a person doesn't know what other heirs or creditors of the estate might make claim to the assets.

Tracy Z. Rewey · Answer

@Burt L. You "unpack" pretty quickly! Thanks for the clarification and makes sense. I am sorry for the loss of your friend. I commend you for honoring the commitment to make the payments. This is one of those times a third party servicing agent would really help provide a level of protection. It might be something to consider to be sure you get the proper credit for your payments (both timely receipt of the payments and the interest paid). While servicing is usually setup by the note holder, it could potentially be an option for you to setup as the note payor/borrower. I'm guessing your are doing this, but just in case, be sure to keep solid proof of the payments being made. Down the road, if you ever think the daughter would like to sell her interest in the note, please feel free to reach out to us. We might be able to facilitate or give her some options.

Tracy Z. Rewey · Answer

@Chris Seveney @Ned Carey Agreed on the confusion caused by being the owner but not the current landlord. Wondered if perhaps @Burt L. has since sold the property (maybe on a wrap)? If you are the current owner and still owe on the seller financed note it might be a simpler option to offer a discounted payoff rather than buying the note as a discount. I've used that strategy when I've bought property with seller financing along with writing in a first right of refusal should the seller ever want to sell the note down the road. Additional ideas might come to light if we know the current ownership status and debt obligations of all parties.

Chris Seveney · Answer

Sorry I a completely lost with your situation.

you mention someone sold you something so I assumed you bought this owner financed but that does not appear to be the case. Then I thought you sold it owner finance but that also does not appear to be the case.

You may want to rewrite this with who owns what and what your role is in this situation...

Bob E. · Answer

@Burt L. I would reach out to the daughter and see what she wants to do. If she intends to sell the note let her know that you are an interested buyer and will beat the best offer she gets. Or Offer her 1k for a right of first refusal.

Burt L. · Answer

Caution- much info ahead; I needed a pen myself!

I much appreciate the replies. I considered the deceased a friend and hadn't yet had someone this close die. To clarify my initial post:

A) I remain the owner of the 4-plex I bought on owner-carry from the deceased. B) I was his landlord for 9 months after the sale as he rented back the same unit he lived in at the time of the sale for those 9 months after the sale. C) He died living in another landlords rental, where he lived for 3 years after moving out of the unit he rented from me. D) His daughter is the sole heir, though she hasn't begun the probate process. E) The sales contract specified at the time of my purchase that if he passed payments are to go his daughter. Of course a sales contract doesn't transfer ownership of a note and there was no will. I have followed his request and sent the first payment of $4,200 to the daughter though probate hasn't been opened.

Many important subjects were mentioned in the responses to the first posting such as purchasing an option on a First Right of Refusal if the note is to be sold, or offering a discounted payoff instead. There was much chaos at the time of the deceased's passing and he was surrounded by unreliable people. I don't know if the original promissory note was preserved (I have a copy).

The sole heir/daughter hasn't started probate and I’m not sure she will if she's already receiving note payments and it was the sole asset - which raises many questions - such as whether assigning the deed of trust would be valid or insurable by title companies and likely would not be absent probate. However, I'm confident the note can't be sold before going through probate either. I don’t know if an option is valid if the personal representative of the estate hasn’t been established.

I'm not in a position to purchase the note or finance a discounted payoff for at least a few months as I'm in the midst of another 4-plex remodel about a mile away from the property this post focuses on. There would have to be a new mortgage on that property to pay off the daughter entirely and I don't currently qualify as I’m stretched too thin on remodeling this subsequent property.

At 5.5% the note on the property is looking better as interest rates are continuing to rise. Of course, even if the note is sold I can keep this 5.5% rate. So I'm making the payments to be consistent with what the daughter read on the purchase contract she got a copy of. I also don't want to set the matters about the note in motion currently though I know a beneficiary would prefer to have a lump-sum all at one time instead of payments as its similar to winning a lottery and the daughter isn’t particularly well-off. Her husband was certainly in a hurry to get the first payment to her.

The current loan balance is $700K. There is about 40-45% equity in the property now but I don’t look good on paper for lenders due to my cash position.

The earlier properties in one’s career can require walking a thinner, riskier line before a base of core assets are under an investors general belt. The subsequent 4-plex that I’m remodeling has me financially and physically pushed. The labor market is very difficult and I'm most of the labor force myself on the property. Interest rates are rising while I complete the project slower myself and its success is being squeezed more and more tightly. It began as a home-run deal based on interest rates just a month or two ago and hope I don’t rescue defeat from the jaws of victory on this second 4-plex.

I'm simply continuing the payments to the daughter for now – not making waves about probate or the interest component being taxable income and buying time in the belief I will receive credit for having made these payments – until I can get the second property completed and financed with a cash-out DSCR loan.

At some point I may have to say there will be no more payments to the daughter until I have her SSN and proof of being the Personal Representative so I can report the interest paid to the daughter and which may set a lot of things in motion like suddenly undertaking probate and shopping for a note-buyer.

So I’m not taking action on the first 4-plex that the post concerns currently, as I can’t meet competing offers on the note. I’m too financially exposed on the second property right now and know there likely will be issues with the promissory note upcoming as you’ve been kind enough to point out.

I'll certainly keep the suggestion made of writing a Right of First Refusal on selling of the underlying note into future owner-carry contracts in mind. I need to be sure that an assigned deed of trust is insurable by a title company also. Buying at a reduced payoff also works and I hadn’t considered that. As mentioned, I don’t know if the original promissory note was preserved by the now-deceased owner. He died 3 days after the police-raid on his subsequent rental house in which his roommates were arrested and his subsequent landlord cleaned out the house in short order afterwards to re-rent it.

Like a weary traveler who just wandered in - there is still "much to unpack" here.

I suspect you’ll let me know where I’ve made a mess of things again!

@Bob E.

@Tracy Z. Rewey

Mention Buying Back My Note To Surviving Beneficiary After This?

Mention Buying Back My Note To Surviving Beneficiary After This?

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