Litigate or create a 2nd note?

2 Replies

I have a property in Sacramento I am looking for ideas on how to handle the owners situation

Owner purchased and developed a lot of 6 homes, lives in one, sold the others, lease optioned one of them right next to his house in 2009. Consideration was catching up the mortgage which was ~30K in default. The optionee and his wife are both attorneys, signed a lease option contract stating they would take care of all principal, interest, taxes and insurance, and catch up the default. The option period was for 15 months, with an option to extend for another 15 months if optionee was unable to get financing in a reasonable amount of time. Option price was $850K. The optionee was added on title and this is where the problem begins. Optionee is unable to obtain financing since he had a foreclosure in 2013 and has multiple judgements against him. He is also in default of his lease option contract a long time ago. 

Optionee has paid 50+ late payments, essentially ruining the owners credit. Property is currently in default since April for ~$80K. Optionee now lives in the property for free, not making any payments and threatened owner if he did anything to pursue, he would come legally "take him down." The current loan amount, estimated is $780K. Property currently comps at about $980K . The owner was planning on letting the property go & get foreclosed and not pursuing any course of action. He had spent money on attorneys the past 3 years, but none were a big help. In fact, the advice he received was to just let it go into foreclosure and not litigate since the tenant is also an attorney....

Now, I already have a local investor with much more experience in these advanced problem solving techniques taking the lead on this one. I wanted to see other investors' input on different solutions. The problem being that there is a title dispute. He could either:

A.) deed the property over to us for a small consideration ($1000), we would then litigate, case is pretty clear cut as everything spelled out in the lease option contract is in owners favor, evict and eject the tenants and possibly claim damages for ruining owners credit. Owner could also do this by himself instead of deeding the property to us but weary about paying more attorney fees 

B.) Have the owner deed the entire property over to the current tenant, have the current tenant catch up the default if he agrees since he will now be more vested in the property, create a 2nd deed of trust payable to the owner, bridging the gap between what is owed on the property and its current value. If owner defaults this time, foreclose him out 

First, are you an attorney? You will litigate for or on behalf of the owner???

Second option, you don't fund a second mortgage or any note without cash or equity, trying to fund a second from an amount claimed due is not really funding with cash or equity and could be contested as being valid debt. I doubt an attorney would do that as they would be reaffirming the debt, but the amounts could still be contested. 

In this, you'll need a judicial foreclosure with the breach of contract as the occupant/optionee has an equitable interest. 

Do not stop attempts to collect amounts due, your claim can become stale and uncollectable as to past payments. Check state laws as to collections.

Obviously the optionee is not a successful attorney, probably a loser with a degree, so I'd go full bore from all directions, beginning with an eviction for possession and fight the option another time, these are two different matters. You may have a better chance of obtaining possession since the optioonee is a lawyer with past foreclosure and judgments, that paints a picture of him in the eyes of a judge, IMO non-legal opinion. Then foreclose or partition on his option rights.

However, not seeing the contracts, can't say too much. If the option was paid, it can still be good. If there were contingencies for performance under the option, it could be the option will be seen more as a purchase contract since an option can't have performance of any kind attached except payment of the option price. And, was this commercial or residential?

Don't go into anything thinking it's a slam dunk, while it sounds good, nothing is over til the fat judge sings. You better be up on collection laws, have an equitable, financially equitable interest in the outcome, more than a grand in a transaction this size for your reasons to get involved, so again, are you an attorney or will you be getting one? :) 

I'm not an attorney but the investor that is taking the lead on this project has attorneys that handle these type of cases. The property is residential. 

As far as funding the second mortgage, that would be the default amount to catch up the first note

Thank you for your insight, definitely helpful