Re-performing Note with a Deficiency Lien Judgment

14 Replies

The Info:

Seller of a note, I'm considering on purchasing, foreclosed on the borrower back on 12/25/2014 and holds a 100k deficiency lien judgment on them. The borrower, same individual, wants to stay in the home and has steady work with proof of income is the DD. The taxes are current and so are the payments since the new workout for 3 months. The new note is in the form of a Land Contract which I know means that if there is default, I can evict and enforce the judgment. I'm looking to purchase at approx 65% to 70% ITV.

My question:

What happens to the original 100k deficiency lien judgment and how if any does it affect the purchase of this note?

If the borrower is living in the home, you may have much more trouble evicting, regardless of the land trust ownership.  I would check with a real estate attorney in your area to see if the rules change in buying an owner occupied note and either evicting the occupant and taking over the property.

Hi Rick

Thats a pretty specific question and Im with @Darren Eady: probably worth paying for legal advice - which I cannot provide. In general terms though:

1. Some states allow the lender to pursue the borrower for deficiency judgements. Some do not. It could be a good source of leverage with the borrower or more-or-less useless! Thats the first question to answer.

2. If you are in NY, is it fair to guess the note is in NY too? If so, you REALLY need to get some paid-for advice. Some counties (Brooklyn - Kings) are infamous for their FC rules. I think we have a note that's been in FC for over 5 years and there is no end in sight. There is a very small group of experts who buy this paper. They have low cost of funds and very long time horizons. 

3. Even if you are not in NY, just because you have a land contract doesn't mean a judge in a judicial state won't set it aside come FC time. They need to be crafted by a professional. 

Three months seasoning on the new deal is better than none....but Id suggest that 6 is the minimum you should expect before its really re-performing. The pricing for a 1-off sounds about right

I think you are going to have to spend some money to get a "real" answer though

good luck!

Paul

Definitely need a lawyer to help you out together

Let's try again - to assess your legal options and put together your plan of action. Good luck.

Hi All,

Thanks for the advice to seek legal review. The note is in Ohio. I should have mentioned that in the Info portion.

@Rick Rapant

It's unclear from your post if the seller intents to retain the deficiency judgment.  The concern I would have is if the seller remains the beneficiary of the judgment is that they could decide to aggressively pursue collection, that could interfere with your borrower's ability to make the payments on the land contract.  For example, the borrowers wages could be garnished. 

In addition, I would be looking at the scenario where the seller defaults and you take title to the property. If this were a first position DOT/Mortgage, your foreclosure would wipe out the lien, but in this case with the contract the judgment may remain on title. I agree with the others that seeking legal counsel on this prior to purchase would be prudent.

Hi Mike,

Thanks for your reply. It's unclear to me as well as I will need to do some more DD with the owner as to the Judgement and its details. I've researched some legal ease on foreclosure law in Ohio and see a contradiction in the value of his Judgement and what is allowed by law. Seems that 2 years after foreclosure the judgement is removed. Going back in for more DD on intent then if it passes call in legal. Thanks again.

yep, could be treacherous.  If the original mortgagee retains the the deficiency judgment, and it was recorded prior to this new note/mortgage, that judgment would be in first position, and he could foreclose again, at your expense of course.  A land contract may well require foreclosure, as opposed to eviction.

Thanks Wayne. More advice well taken.

Stop the confusion.

The OP states he has a Seller of a Contract for Deed where the previous Mortgagor resides in the property and the Seller also holds a Deficiency Judgement for same debtor.

The Deficiency Judgement can not attach to the real property which is under Contract For Deed since the ownership of that property is vested in the name of the Seller of deal. At some point in the future, when the Tenant/Buyer pays off the CFD that judgement may attach as THAT is when title vests in the Tenant/Buyer's name.

Contract For Deeds are not lease or rental contracts and it may not be as simple as eviction.  In Ohio they will treat CFD like a mortgage where you will have a process that looks more like a foreclosure than an eviction.  

Terminology matters here.  Seeking a judgement on a deficiency expires within 2 years.  That is the same for all states that allow them.  If the prior Mortgagee does not bring suit to obtain a judgement after 2 years they missed their window to get one.  

An actual Deficiency Judgment is the actual judgement from the court that the prior Mortgagor/Borrower is obligated to pay $X with Y% to the prior Mortgagee or their assignees.  So if the Seller has a "Deficiency Judgement" that does not expire in 2 years.  It expires in 10 and can be renewed easily.  

This situation is awkward in form.  It is not common for a Borrower and Mortgagee to be very friendly while a deficiency is being enforced.  The DF does represent a substantial credit risk as it can be used to garnish wages or attach to bank accounts among other collection tactics.  I could see how the DF might be being used as some form of duress onto the Tenant/Buyer and that would be problematic.  

That said, I would rather own it and control it than have another creditor able to collect and mess up my Tenant's capacity to pay.  To address the OP question at the bottom of the first post - the Deficiency Judgement is its own stand alone instrument.  It has value in the secondary market relative to unsecured debt with a little bit of a premium.  The DF is not included, attached or part of the Contract for Deed.  If there is any crazy language in the CFD that talks about the DF leave this deal and don't look back.  They should not be linked outside of the two parties commonality.  

Understand when you purchase a CFD you are purchasing the property with a contract in place much like purchasing a rental property with tenants in it.  The CFD will bind you to the terms of payment which if the Tenant/Buyer meets those obligations you must transfer the title to the Buyer's name.  Until such time, you are the property owner with limited rights thanks to the CFD.  The Tenant/Buyer gets to enjoy a right proper notices and rights to redeem any default under the contract before the Vendor (holder) can enforce an action.  This instruments are very problematic IMO.  They imply self-servicing which leads to improper dealings with the Tenant/Buyer.  They are grossly misunderstood and subsequently miss used by the populous at large.    

Case and point, so the Vendor who use to be the Mortgagee found it necessary to foreclose the prior Borrower who is now the Vendee based on some default under the Mortgage.  Then it became a wise idea to turn around and sell the same property back to the Borrower/Vendee.  Why didn't the Mortgagee/Vendor just reduce the principal of the loan back then and maintain the Borrower's interest in the property.  All that needed to happen based on the updated situation was create a more affordable payment.  So based on that idea, you have to ask, was anything done improperly?

Was the property actually foreclosed or was it a deed in lieu?  If it was a DIL - walk away.  I will bet you it was done wrong.  Did the Borrower get reassurances from the prior Mortgagee they could stick around in the home and thus did not attempt to defend themselves in the foreclosure?  The foreclosure could have issues.  

Some of that is overly pessimistic but it illustrates the line of thinking to guard yourself.  Like I said, foreclosing a borrower is not all flowers, rainbows and pony rides.  Foreclosing AND getting a deficiency judgement usually doesn't put the parties on a each other's holiday card list.  

Can it happen?  Yes.  Can it be "OK"? Yes.  Do you really need to check it ALL out?  Absolutely.  You will inherit what ever was done - even if done incorrectly.  Good Luck.

@Dion DePaoli

Again, you had to point out the obvious...it's a CFD so "mortgagor/tenant buyer" doesn't have title. I have to be careful crossing the street....didn't see a car, but got run over by the Mack truck! If there is a deficiency judgment laying out there, obviously the buyer won't be able to refi out, if that was an expected exit plan, aside from the obvious credit issues the buyer now has.

Dion, Wayne,

Lots of input with very good points to consider. I researched a lot on the Ohio Foreclosure Laws last night and read just about everything you mention and with the way you explain the plus and minuses you made it all clearer. I might not take this any further as for right now I'm looking for a more passive investment which I know do come with a higher ITV. 

Thank you all for your input. This forum is an outstanding place that is full of information and I've learned so much by reading all your comments not just for this post but for everyone I've read on notes. Keep up the good work and thank you for the paying it forward. 

@Rick Rapant

Be sure you're aware of R.C. 5313.07. This is an Ohio statute that governs recovery of possession of a property that is under a land contract. In short, if the vendee has paid on the land contract for at least five years or has paid at least 20% of the total purchase price, your remedy is foreclosure. If not, your remedy is eviction. Evictions, naturally, are a lot faster, cheaper, and easier than foreclosures.

Timothy Murphy III, Real Estate Agent in OH (#SAL.2016005240)
440-941-3846

Thanks Tim. I did read that in the Ohio foreclosure law site I was on.

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