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Land Contracts, Foreclosures and Bankruptcy: A bad combination for all
by Robert Franco | 2009/11/24 |

When Sherry Smith and her fiance, Patrick Greenwalt, moved into their home in April 2007, they believed that they were buying it on land contract for $30,000.  Sometime thereafter, Allan Tidwell, the owner, mortgaged the property for $55,000 and fell behind on the property taxes.  Facing foreclosure, and a tightening credit market, Tidwell filed bankruptcy.  Smith, in a precarious position, has consulted her attorney to find out if she has any right to remain in the home.

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This deal really isn't so unusual.  It seems rather common for those heavily in the real estate rental business to sell homes on land contract when they can't find a buyer.  Though they often call them rent-to-own agreements, they are structured like traditional land contracts.  The problem is that when the deals are consummated, neither party consults an attorney to ensure that both parties' interests are well protected.

Aside from the apparent lack of legal advice, there are several problems with the Smith/Tidwell transaction.  First, it doesn't seem as though Smith understood the agreement.  According to an article on Evansville Courier & Press, the contract required Smith to pay the taxes.

As for the delinquent taxes, Tidwell cast the blame back on Smith and Greenwalt. He said they originally were to pay the property taxes on the house. But following a missed payment due in Nov. 2007, he took over that responsibility.

Starting July 1, he increased their monthly payment to $341.50 in order to cover what was owed. Even that wasn't enough to make up the delinquent payments, he said.

Smith said she had no way of knowing the taxes were overdue. Tidwell never told her, and she assumed they were being escrowed by the bank. 

Clearly, she did not understand her obligations under the contract.   And, she had one year to purchase the property before the contract expired. Although Smith couldn't meet the one-year time frame to purchase the home, Tidwell allowed them to stay in the home as tenants.

As for the mortgage, Tidwell said he waited until the sales contract had expired before obtaining it. Since Smith and Greenwalt didn't own the property, he saw no obligation to tell the bank of the unconsummated deal.

Another problem was that the land contract was never recorded.  Even if it had not expired by its terms, the failure to record it would have been devastating to Smith's rights in foreclosure and bankruptcy. 

He saw no reason to take the original sales contract to the Vanderburgh County Recorder's Office because the transaction never officially took place, he said. The recorder's office lists the house as belonging to Tidwell.

Tidwell contends that he was a victim of the housing and credit market crash.  Although he routinely forwarded the payments Smith made to his lender, the banks were calling his loans.  With credit more difficult to obtain and the declining values of his properties, he had little choice but to file for bankruptcy.

Tidwell said Smith and Greenwalt should recognize that their plight doesn't result from any particular negligence toward them, he said. Every time they paid their monthly rent, he faithfully forwarded the money to the bank, he said.

Still, he couldn't exclude the house from the bankruptcy simply because the payments on it were current, he said.

The bankruptcy trustee's job is to maximize the value of the bankruptcy estate for the benefit of the creditors.  They have broad powers to set aside executory contracts, leaving the other party with an unsecured claim in the bankruptcy case.

In Tidwell's bankruptcy, it appears that the property has declined in value and there may be no equity for the unsecured creditors.  Thus, the trustee will likely abandon the property.  Even though the bankruptcy trustee likely has no interest in this property, the county is still owed delinquent taxes and the bank will probably be preparing to foreclose.

At this point, it appears that Smith is nothing more than a renter.  The contract under which she took possession was never recorded and, even if it had been, it has expired.  If she has any equity in the home, she may have an unsecured claim in the bankruptcy.  Still, if she would like to stay in the home, she will need to negotiate with the county and the bank.  Given the taxes owed and the balance on the mortgage, it may be a tough task.

The moral of the story is that a visit to her attorney before she entered into this arrangement could have spared Smith much of the problems she now faces.  The land contract could have been drafted to provide her with a better chance of completing the terms.  The attorney would have most certainly made sure that it got recorded to preserve her rights against third parties, such as the lender and the bankruptcy trustee.

When non-attorneys attempt to negotiate a deal without legal advice, they tend to only look at the substance of the deal (i.e., the sales price and monthly payments).  They neglect to think about the consequences of foreclosure and bankruptcy.  Even in 2007, before things really started to fall apart in the real estate industry, an attorney would have considered these possibilities.  Today, it is even more imperative to consider these events when entering into a land contract.

Even if the owner is in solid financial condition, banks are tightening their lending requirements and they can call notes due, regardless of the owner's payment history.  Banks are all trying to reduce their exposure to risk.  This means that they are less willing to renew existing financing, even for those who have been good customers in the past.  With few options for new financing available, owners face the real possibility of foreclosure on investment properties.

Robert A. Franco


Categories: Banking & Finance, Foreclosures

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Source of Title Blog

Robert A. FrancoThe focus of this blog will be on sharing my thoughts and concerns related to the small title agents and abstractors. The industry has changed dramatically over the past ten years and I believe that we are just seeing the beginning. As the evolution continues, what will become of the many small independent title professionals who have long been the cornerstone of the industry?

Robert A. Franco



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