All Forum Posts by: Derek Dombeck

 Slander of title applies when you don't have a valid claim against title. When a seller signs an option and pledged a mortgage there is no slander.

Now let's play out a scenario.

You find a homeowner that has a house with a bad roof that is worth 500k. They can't afford to replace the roof, so you pay 20k to them in order to get the roof replaced and in return you get a 20 year option to buy the house for 500k. Likely, you would wait at least several years until that property had more value before you would exercise your option and the family continues to enjoy their dry home. Now 10 years later the house is worth 750k and you want to buy it. The sellers refuse to close. From your last comment, it sounds like all you think you would have a right to is your 20k. My argument is that I'm foreclosing because I'm responsible to pay them 480k more and have rights to the 250k of value increase as a return on my 20k investment. 

Forgive me if I misinterpreted your lost post.

As far as case law, I can't give you specific cases to look up. My network of friends that does this often all fall under the thought process of put the documents in place, but we all prefer to work things out with people when there's an issue and avoid court, so I've discussed many different weird stories with my friends but I can't quote a case.

 Based on all the information you provided. you will not get a loan from a third party. 

What you did not answer is: How much cash do you have to invest right now?

There are many here on BP that answer this question with zero. What they do not understand is even getting a MF with 100% financing is going to bankrupt you as you need considerable reserves. Think of buying a 10 year old porsche, you can buy it but if you have ZERO money to maintain it you will end up losing it. Now take a MF building that is 25x that price. a $3M building probably has a $100k roof. You have that type of money? A leak will cost you $10-$25k. Upkeep for brick repointing, window repairs, code compliance etc. Properties are EXPENSIVE. there is no building today especially in NY city that with 100% financing will cash flow positive. 

 I don't want to discuss foreclosure laws since every state is different, but I will tell you that my mortgages state the amount of my purchase price on them when recorded. And my argument if I had to foreclose would be I'm losing the value of the property had I been allowed to exercise my option. The practical side of what I do, is I've never had to enforce a transaction because it's all explained upfront and people then follow through with their promises as they should. If I ever have to use the mortgage, I can decide at that time if I want to go to court or not. It only costs me $35 to record this extra piece of security, so why not do it.

 You are correct in your thinking. That's why I secure the option with a mortgage because I could do a friendly foreclosure with the seller involved and wipeout Jr liens behind my option as well as having a solid position during a bankruptcy where hopefully i could still get the property. That would depend on senior liens ahead of me though.

BTW, I have had several fun debates with attorneys over the years and none of them had ever considered doing this.

 It would depend if the buyer actually new there was an option in place or not.

The only way the title company would get sued is if there was proof they new about the option and allowed the 3rd party transaction to happen.  Yes, I have heard stories from other about it happening,  but no it has not happened to me.

Your comment about sueing for specific performance is exactly why I like the mortgage. I would just foreclose instead of sueing for specific performance because the outcome is predictable and foreclosure law is more black and white compared to contract law in my experience and humble opinion. 

 It doesn't take a special seller at all. I do it on every option I ever get and the conversation is simple.

I simply ask the seller are you a trustworthy person? When they say yes, I say that's great because some people have been known to go back on their word and not want to honor an option. To avoid this, I ask that you secure our agreement with a mortgage that pledges your property as collateral for our agreement. And they say ok or I do not do the deal. 

If they said no, my rebuttal would be asking them why not, are you planning to not follow through with our agreement? 

Many people forget that all a mortgage or deed of trust is is a security instrument. It can be used to secure any agreement, not just promissory notes.

One alternative is to actually purchase a option instead of lending. Its taxed differently and gives you all the security of a loan if done correctly. 

Lets assume you find someone at the local REIA that has a project house and they need 100k for the rehab. You give them the money in exchage for 10% of the equity and 50% of the cashflow, if its to be held as a rental. (BTW you have to calculate the proper percentage to hit your desired yield)

Next you determine the length of the option and any additional provisions that you desire. Now you draft a 2nd document. And that is a mortgage the property owner is pledging to secure your option. This document is key to your security. Almost nobody does this and I've schooled enough attorneys over the years to know that they don't like my method and here's why. Most people would just record the option on public record and be done. But, let's assume the property owner decides to try selling the property without honoring your option and somehow they succeed.  The title search may have missed the option which has happened before. What's your recourse? You can sue the title company and go after title insurance and or sue the property owner to which eventually you will likely win a judgment, but that doesn't mean you will get paid. It's your responsibility to collect on said judgment. Plus you are arguing contract law which is open to the courts opinion about the intent when drafting the option to begin with.  I do not like the gray areas of having a judge misinterpret our agreement. 

Now let's assume the same scenario, but you have mortgage in place. You file for foreclosure against the new owner and take the property away from them. They can go sue the title company and fight with the seller to try getting their money back. You get the asset or paid in full at a sheriff's sale. Plus foreclosure law is far more black and white than contract law. 

This method also allows you to do a friendly foreclosure in the event your property owner ever gets leins or judgments in junior position behind your option which protects both of you.

Lastly, there are zero rules to how you structure the terms of the option, so as long as both parties agree it can be done. I like holding options in my retirement accounts as they do not have liability risks.

BTW, I owned a hard money lending company for 10 years and it's a great business when done right.

Good Luck!

 Jay,

You need the option which has the terms of the transaction (similar to a promissory note) and then you record only the mortgage securing the option. 

This way, nobody can see the terms of your deal as the Option is not made public. Of course you could record a memorandum of option and accomplish the same thing, but the mortgage gives you way more security