What if my AFS seller goes bankrupt in the future?

[JohnSoucie]

Many Quickturn deals involve sellers who may be going through some financial difficulty. We buy their house with an Agreement for Sale, thus most likely averting/delaying any really bad financial situation they may be slipping into. That`s all great.....now. Win-Win

Who says their financial woes go away completely just because the`ve unloaded their house? It occured to me that I don`t have any understanding of what happens should they eventually fall into bankruptcy in the coming years, before I`ve cashed them out.

I thought bankruptcy required that all debt be removed from the bankrupt persons name. Well, the mortgage is still in their name. What happens when the trustee attempt to get that mortgage off the sellers name? It seems to me like it must certainly bring up the Due on Sale clause in a swift way. Pay the mortgage off immediatly so the trustee can complete the bankruptcy proceedings. Add to this, the fact that you will certainly not be in the loop if this all goes down 1 or 2 years after you have bought the house. That phone call or letter might be a bit of an unexpected shocker to say the least!! Especially if you can`t come up with the cash immediatly......

Did I miss something in Edmonton and the CD`s/course that covered this?

Thanks;
John Soucie

 

[Thomas Beyer]

that is a risk. You are NOT yet the legal owner .. it is an agreement for (future !!!) sale .. but you will get a chance from the court to protect yourself, i.e. buy the property before the bank forces encumbrances,including yours, off title !

 

[dleischner]

Hi John,

I had a conversation with Tony Peters and my lawyer about this too. You definitely aren`t protected against the vendor going bankrupt with an AFS.

That is a major risk you should be ready to deal with it happens (have a JV partner waiting in the wings to qualify for the mortgage if this happens). I heard that some banks will allow you to assume the mortgage if foreclosure is their only other option (I haven`t looked into this myself).

Dean

 

[Thomas Beyer]

QUOTE (dleischner @ Dec 14 2009, 08:13 AM) Hi John,

I had a conversation with Tony Peters and my lawyer about this too. You definitely aren`t protected against the vendor going bankrupt with an AFS.

That is a major risk you should be ready to deal with it happens (have a JV partner waiting in the wings to qualify for the mortgage if this happens). I heard that some banks will allow you to assume the mortgage if foreclosure is their only other option (I haven`t looked into this myself).

Dean
exactly. AfS is an agreement FOR (future) sale .. you are not yet the owner. You just agree to own it in the future with some money today, some money while you go along (to pay for his mortgage usually plus a bit) and some more money in the future !

Let`s differentiate between ownership and a contract for intended future ownership !

 

[JohnSoucie]

Thanks Thomas and Dean for the replies. I fully understand what the AFS implies(future ownership) but was confused as to how I could be the only person out of the 400+ people in Edmonton to ask this question publicly, even though the answer is actually very straightforward. You need to buy it cash or have the ability to qualify yourself or have a JV partner waiting to qualify for a mortgage. Maybe this was instantly obvious in Edmonton to everyone but me, but somehow I doubt it. I don`t think that people could see past the $$ signs to look that far into the future.

I guess this is just one more red flag to everyone for tempering what Ron LeGrand seems to have no problem saying repeatedly with such conviction...."little or no risk"....but in a couple of cases already, upon further investigation is actually quite a serious issue that needs to be addressed or at least clearly acknowledged and highlighted at the training phase.

How 400 people could get through a 4 day course without this coming up as an important detail is beyond me!

I`ll add this risk to the other biggie that recently popped up....
-"your only risk if you don`t close is to lose your deposit".....and possibly get sued.

Does anybody know if Ron did cover these two points at all, even if he glossed over them quickly? I just don`t remember hearing about them.

Thanks;
John Soucie

 

[marcp]

I`m curious as to what the magnitude of this risk is, depending on exactly how much money you put down to close the AFS deal?

If you bought the property with an AFS and very little or no money down, is your risk limited to losing the money you put down?

If you bought a house that has $100K of equity, and your AFS says you`ll pay back this equity to the seller in 6 years, would you have to come up with it now if the seller goes bankrupt?

Barry McGuire said his AFS was over 20 pages long, perhaps they address these issues in their AFS agreement?

I guess I`m raising more questions and not answering any...

Cheers,

 

[RedDeerWilliam]

Hey John,
There`s no question that I get caught up in the dollar signs ($$

$$) during that event! But there was a lot of info to take in too!

From what I`ve been discovering about preparing to do Ugly House wholesaling, you have to do `Due Diligence` no matter how promising or exciting any new way of doing real estate comes along. And no matter how "low risk" the instructor says it is!

I`ve learned that yes, there are different rules in Canada versus the U.S. and I don`t think Ron would be aware of all those differences because he doesn`t buy here, as far as I know. However there are past graduates who have succeeded using Ron`s techniques and those are the people who are good to talk to about issues like this one because I`m sure many of them will become aware of some of points you and I are discovering! I personally think Ron would be wise to create a Canadian crew working for his network who can address Canadian specific questions and situations and who live and do (& have done) business in Canada.

Keep in mind that even REIN doesn`t know everything. Do you remember that awkward moment when Ron put Russell on the spot about protecting your assets in a corporation! I still think the leaders in the Legrand and REIN heirarchy do the best they can do with what they`ve learned but ultimately we all STILL have to do our due diligence! We are all still learning every day - even the big guns at REIN and the FFN! Didn`t Ron say at least once at the bootcamp that he still learns something new about how to do real estate, even after doing it for so long!

I`ll be honest, I really wish we wouldn`t have to do Due Diligence, but dang it, the one time I don`t do it, it seems to come and kick me in the butt! Damn Murphy and his laws!

Seems to me that the guys that have it the best are the lawyers because new things keep coming up during real estate deals that gives them new precedents to work with. Just look at all the information that Barry MacGuire has shared with the REIN group over the years and I`ll bet he`s probably not repeated much of his teachings because new things just keep popping up. Real Estate isn`t easy and there are things that can grab you even with some of the best preparations made. I guess we have to chalk those up to learning experiences and enjoy the ride as best we can!

QUOTE (JohnSoucie @ Dec 14 2009, 02:18 PM) Thanks Thomas and Dean for the replies. I fully understand what the AFS implies(future ownership) but was confused as to how I could be the only person out of the 400+ people in Edmonton to ask this question publicly, even though the answer is actually very straightforward. You need to buy it cash or have the ability to qualify yourself or have a JV partner waiting to qualify for a mortgage. Maybe this was instantly obvious in Edmonton to everyone but me, but somehow I doubt it. I don`t think that people could see past the $ signs to look that far into the future.

I guess this is just one more red flag to everyone for tempering what Ron LeGrand seems to have no problem saying repeatedly with such conviction...."little or no risk"....but in a couple of cases already, upon further investigation is actually quite a serious issue that needs to be addressed or at least clearly acknowledged and highlighted at the training phase.

How 400 people could get through a 4 day course without this coming up as an important detail is beyond me!

I`ll add this risk to the other biggie that recently popped up....
-"your only risk if you don`t close is to lose your deposit".....and possibly get sued.

Does anybody know if Ron did cover these two points at all, even if he glossed over them quickly? I just don`t remember hearing about them.

Thanks;
John Soucie

 

[JohnSoucie]

QUOTE (RedDeerWilliam @ Dec 17 2009, 11:58 PM) I`ll be honest, I really wish we wouldn`t have to do Due Diligence, but dang it, the one time I don`t do it, it seems to come and kick me in the butt! Damn Murphy and his laws!

Not sure why you keep mentioning due dilligence for this question?The issue that I am talking about really has nothing to do with due dilligence. Yes you do due dilligence on the house and the deal. You certainly aren`t going to not do a deal because your due dilligence uncovered that the sellers credit doesn`t look good.....that`s why you are talking to him in the first place! You are making an offer to take over someones debt and leave it in their name for possibly several years and the seller is selling because you and he both know he is going through financial difficulty. This has nothing to do with whether the ARV checks out, etc. The sale may alleviate his financial problems now, but any amount of due dilligence will not tell you or even imply whether he gets in further financial trouble in a year or two. Due dilligence is not really the issue here.

The issue is what is the reality if brankruptcy happens in the distant future.....and the answer is as previously pointed out. Essentially you gotta pay off the mortgage held in the other guys name.

John

John

 

[JohnSoucie]

QUOTE (marcp @ Dec 17 2009, 03:53 PM) I`m curious as to what the magnitude of this risk is, depending on exactly how much money you put down to close the AFS deal?If you bought the property with an AFS and very little or no money down, is your risk limited to losing the money you put down?If you bought a house that has $100K of equity, and your AFS says you`ll pay back this equity to the seller in 6 years, would you have to come up with it now if the seller goes bankrupt?

Barry McGuire said his AFS was over 20 pages long, perhaps they address these issues in their AFS agreement?

I guess I`m raising more questions and not answering any...

Cheers,

Hi Marc;

You bring up more food for thought!! I was solely thinking about institutional debt when the bankruptcy trustee pulled all the credit paperwork and would find this outstanding mortgage.

If you bought the property with an AFS and very little or no money down, is your
risk limited to losing the money you put down?
I think this is exactly the issue.....you did buy the house. You owe him(his mortage actually) the money. You had planned on paying their mortgage for several years. Now the mortgage must go away....you need to step up and actually pay the seller cash... now, who then has to pay off his original mortgage. There is no walking away at this point I don`t think, you own the house.

But if you gave the seller a note of any kind, with various terms or amount for his equity, I guess the note is also recorded(is that common practice?) and would therefore, I`m assuming, come up when the trustee did his work.

So, is the question now possibly....does the trustee also have to call in all money that is owed to the person going into bankruptcy?

In other words, does the trustee have to clear/settle all debt and receivables from the persons name? A double whammy for us if you paid any substantial amount for the equity by way of a note.

I don`t think the equity you paid cash for(not talking about notes here) is an issue as you will have had to pay off the mortgage either way and you now own the home...the cash you paid is now your equity. Did I undersstand you correctly?

Thanks;
John

 

[RedDeerWilliam]

Just to clarify in this case John, what I meant by `Due Diligence` didn`t have to do with the deal or the Seller you referred to. I was referring to doing your `Due Diligence` on the techniques that Ron Legrand (or any speaker/teacher) introduces in a seminar/workshop format.

You have to take what is taught and find out how that works here in Canada or more specifically in the area of the world/country you are doing business in. Find out what`s the same and what`s different and what to watch out for that may NOT have been mentioned at the workshop.

If one just goes about blindly into anything taught at a seminar without doing some homework, then they could be in for some surprises! I`m not arguing any of your points. They are good ones! I`m just trying to say that one has to check every new investing technique out with their own lawyers, accountants and realtors (where necessary) on what is taught in a workshop. Sometimes things aren`t said, or are missed or overlooked (maybe even avoided) during workshops. Even something as obvious as the situation you bring up!

I think from your astute observation, it points out is that when you do a credit check of the Seller, you closely observe what other debts he has on his credit report to see if he is on his way to financial oblivion. I can`t remember if Ron ever mentioned that we should do a credit report check on Pretty House Sellers but based on the possibility you have to clearly pointed out in this thread, I`d say that you better make this part of the due diligence on the deal too!

QUOTE (JohnSoucie @ Dec 18 2009, 11:01 AM) Not sure why you keep mentioning due dilligence for this question?

 

[BarryMcGuire]

Hello to all. Just back from a warm weather holiday and catching up on posts, ( missed that -46 day in Edmonton !! ).
I`m not a bankruptcy/creditor`s rights lawyer but here are are few thoughts:
1. Bankruptcy does not necessarily mean the sale of all assets by the Trustee. Some assets might have a value but be more trrouble to sell than they are worth . Typically a Trustee deals easlily with unsecured assets, i.e., those with no mortgage, lien, personal property registration against the asset(s).
2. The Trustee cannot immediately get at a property with a mortgage. Why ? Because the lender is a secured creditor, his loan is protected by the mortgage which ranks ahead of the Trustee`s claim. So, bankruptcy does not immediatley cause the sale of the property. You as a buyer under an AFS will have registered your caveat claiming an interest because of the AFS. The Trustee must communicate with you regarding his plans for the property so you will always have a chance to have your say. Another good reason to make sure you get that caveat filed !!
3. If the house is a personal residence, the owners have personal exemptions to , I believe , $ 40,000 each for a husband and wife.
For example if a house is worth $ 400,000 with a mortgage of $350,000, there is nothing for the Trustee because the lender gets the first $350,000 of any sale and if owned by a husband and wife, their $ 40,000 personal excemption each for a total of $80,000 protects the balance of the $50,000.
4. If not a personal residence, then the $50,000 equity would be available to the Trustee. Whether the Trustee forces a sale of the home is another matter governed by the cirucmstances of each case.
5. The Trustee cannot take equity that an AFS buyer has created. Using our example, if the property is not a personal residence and the AFS deal when you bought was $20,000 down with an unpaid seller`s equity of $380,000 for a total of $400,000 and a current value of $450,000 , then what happens ? If the trustee forces a sale, the lender gets their $350,000, the Trustee gets $ 30,000 and you get $50,000.
6. In a low/no equity situation, the Trustee may not take any action at all as the costs of sale might be higher than any predicted return. Trustees are very amenable to discussing situations and you could potentilly " short " the Trustee on a very heads up basis. For example if there is only $ 20,000 equity for the bankrupt, realtors commission alone could be $16,000 plus GST on a $ 400,000 sale and the Trustee knows this. You would have a good chance at buying that $20,000 equity for a few thousand dollars because the Trustee won`t get any more if they force a sale.
7. Bankruptcy illustrates our point in the Focus Workshops that it is very important in the low/no equity situations that you try your best to get a Power of Attorney so that you can be in charge to make sure the seller`s payments are being made and that the lender is kept onside.
8. Once the seller goes bankrupt and if the lender becomes aware of that , there is a chance that they will not renew the mortgage even if you are making sure the payments are up to date. Be aware of that and think about chatting with the lender well before the renewal date to see what their position is.
Hope this helps
Barry