Chapter Five: Pie in the Sky

Chapter Five

Pie in the Sky

Ben did not stay around long enough to discuss the real estate venture which had been part of his get-rich-quick course. He left a copy with me, and I shall present it here. It may not be entirely understandable to you, but I shall sort out the details later.

I use it as an example of how far afield an innocent, ambitious person can be led, if he has $475. I don't claim that all real estate presentations are in a class with this one. I haven't read them all.

Well here we go! A young couple was looking for a real estate investment. They found a property, which was worth about $80,000. It was on sale for $70,000. Nevertheless, the seller agreed to accept a price of $62,500. The property carried a first mortgage of $50,000 and was assumable.

Thus, there was an amount of $12,500 to be accounted for by the purchasers, which equaled the difference between the $50,000 mortgage and the $62,500 selling price. To avoid a down payment, or any immediate payment for that matter, they gave the seller two notes.

One note was for $5000 and was due and payable in 60 days. Note number two, for $7500, had a five-year term and was a little more complicated. It carried 13% interest and was secured by a mortgage on the property. It also contained a clause forbidding its recording for at least 60 days after the close of escrow. Another condition made the $7500 note subordinate to any new financing which the buyer might decide to add to the original $50,000 first mortgage.

The buyers get a $10,000 loan, on the basis of their $30,000 equity. (The equity is computed as the difference between the $50,000 mortgage and the $80,000 so-called value.) With the loan they pay off the $5,000 sixty-day note and pocket $5,000.

Keep reading, I'll make it clear later. The $7500 mortgage becomes a third mortgage, and the $10,000 occupies second position, while the $50,000 continues as a first mortgage. They consider that they have a $12,500 equity in the house since it is considered to be worth $80,000 while the mortgage total is $67,500.

So there we have it. The seller has disposed of his property. The young couple has acquired a house and $5,000 in cash. The lecturer receives oohs and ahs of admiration from his class and abruptly announces there will be a ten-minute coffee break. This precludes any questions and gives the class a chance to break up into groups and ruminate on how silly they have been to spend their time working for living.

Now let us return to the two principals in the deal. The class lecturer has left them to their own devices, but there may be problems.

First, let me clarify some of the words and phases used in putting the deal together. I want the reader to have a clear understanding.

Okay! An assumable mortgage is one which may be taken over by a third party. But it isn't quite that simple. The holder of the mortgage must approve the transaction and will check the applicant's credit to determine his ability to pay and the way in which he has handled his affairs in the past. Also, a check of the agreement of sale is always a must. The mortgage holder does not want and probably would not allow additional mortgage payments to be added, since it would affect the ability of the buyer to make payments on his first mortgage.
He also wants to be sure that the buyer has made a cash investment in the property. Otherwise the buyer can walk away from it at anytime without a loss. If any of the above conditions have been violated, one may be sure almost to a certainty that the $50,000 will not be assumable.
It was stated that the five-year note for $7,500 could not be recorded within 60 days of the close of escrow. Thus we know that the deal was placed in escrow. This means that all of the details of the transaction must be disclosed. By details, I mean the matter of the two notes, the limit on the date of recording and the subordination of the $7,500 note to any other loans.
Placing a deal in "Escrow" means that the agreement of sale is turned over to a lawyer, an escrow company or a title company, which represents both buyer and seller in the transaction.
An escrow is finished when all of the items set forth in the agreement of sale have been completed. All items which affect the title to the property are recorded, and the Title Company issues a Certificate of Title Insurance.

This, in essence, means that the purchaser is guaranteed that there are no obligations recorded against the property, other than those listed at the time of sale. The Escrow Agent checks the record at the Recorder's Office at the moment that he is about to record the new deal.

The time of recording is set out precisely and stamped on the deed to establish the true picture of the status of the property at the moment of change of ownership.
The matter of recording a document is very simple. There is a Recorders Office available in each community. Simply present the document which you wish recorded, and it will be copied as a matter of public record.
It is essential that any indebtedness against a property be recorded so that it will be on public record. It's dangerous to leave a financial obligation unrecorded. For example, you may own a first mortgage against a property and fail to have it recorded. The owner may decide to use the house as collateral for a second loan. He does not know and is not required to know that you have not recorded your mortgage.

Thus, when the second lender records his loan, it becomes a first mortgage, since it is the only loan of record against the property.

Many people do business with a shake of the hand and have nothing in writing, let alone anything to record.

How many times have we all heard, "Oh I would trust him with anything I own. I have known him all my life."

I am sure that the same people do not realize the risk to which they have exposed themselves. What do they do when the daily paper carries an obituary of their friend, who failed to make it across the street one day?

Do you suppose that the executor of the estate or the Probate Court would accept your statement that you and your deceased friend had shaken hands to the tune of several hundred or several thousand dollars? No, I am afraid you would be out of luck when you tried to collect.
It was stated that the $7,500 note would be allowed by the seller to be subordinated to any other financing that might be arranged. This simply means that any other loan would take precedence over the $7,500. Since the $50,000 was the first mortgage, the new loan of $10,000 would be allowed to take second place.

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