Second note defaulting, am I screwed?

I took a second for 5k on this small house. Here is the letter I sent to my attorney and his advice. I need a second opinion.

I thought I would ask about a matter concerning (withheld) and the property you helped me with at (withheld).
(withheld) wrote me an odd letter. He hasn’t paid me in about 5 months on the second with no explanation. I really haven’t bothered with it since it’s a small amount of money and I have been busy on the road but now that I am home I am finally going through all my mail.

Here is his letter dated 06-05-2004

I must inform you that the foundation slab in my home is severely cracked and the house is sloping thereby, causing further damage. One pier has Slipped by one inch within a year’s time. I was not made aware of the true extent of the condition of the foundation slab until I got a Professional evaluation from a reputable foundation company. I was told about the condition of the soil and that it will continue to create further damage to the home. The cost of sinking twenty six piers will cost $9850. I can never sell the house through a reputable real estate Company or a buyer to get financing if no repair is made. I urge you to consider waving the lien you have on the house; (note after the fact) I Feel by silence on your part concerning the foundation that I am protected under the Texas deceptive trade practices act. I will appreciate you Will seriously act in good faith. Ten days response requested. Sincerely (withheld).

He also sent me a e-mail I sent him asking him to let in the foundation inspector on 05/01/2003. Why he sent this I do not know. My guess is that I received some information from the report that I kept from him. The report showed none of the problems he mentions in his letter.

This letter struck me as odd. I paid 200$ to buy a Foundation inspection on May 01 2003. I bought it from:

(withheld)

He also sent me an e-mail I sent him asking him to let in the foundation inspector on 05/01/2003. Why he sent this I do not know. My guess is that I received some information from the report that I kept from him. The report showed none of the problems he mentions in his letter.

I believe I also gave a copy of the report to (withheld). I am not sure though. We did discuss the cracks in the garage and I told him what the engineer had told me that the concrete in the garage was a separate item from the foundation piers as laid out in his report. I am no foundation expert and had to rely on what the engineer told me.

Here’s is the engineer’s conclusions word for word. I can get you a copy of the report if you would like.

Findings:
The following structural items I observed during my inspection. It is my opinion that these items may contribute to, and or lead to future foundation related problems.

1. Minor sheetrock cracks were observed within interior portion of the residence
2. The floor is not level in areas of the residence.
3. No soft spots in the sub flooring were observed
4. Some door frames were observed to be slightly out of square.
5. No doors were observed to stick when closing
6. The supporting piers and floor framing was observed to be in good condition.
7. The concrete floor in the garage was observed to have cracks and be out of level.

In his conclusions the engineer says that the concrete floor in the garage is independent of the foundation. He goes on to say that in his opinion

That “leveling and shimming of the floors is not required.”

Since you wrote the documents we closed with I guess you would know if the second note has any “teeth”. I am perplexed and would like your advice. The way I read the documents he bought the house “as is” and he had responsibility for "due diligence” on his part. I recommended he get inspections on his own.

Do I have the right to foreclose on this note for non-payment on his second? Would it cost me more than its worth for you to help me? He has since refinanced the first with a mortgage company. I believe he pays P.I.T.I. to the mortgage company. I am a little unfamiliar with my rights in this matter. I would like to foreclose on the second and take over the first. The payments are not that much and I could easily rent it out for a profit. I think either Mike is trying to pull a fast one or has a foundation repair contractor trying to make him pay for some costly repairs. In any event I have not been paid on the second for several months with no explanation.

Please let me know your thoughts on this.

When you generate a bill my new address and phone are:

(withheld)

Attorneys answer

The copy of the sales contract I have provides that he purchased the property in its AS IS condition and that he had it inspected. It is unlikely that you could be held responsible for any damages relating to this problem.

It probably would cost you more than you’re owed to foreclose on the property, and the senior lienholder would have to be paid off first. If the property is in poor condition as (withheld) states, you may run into a problem where the property is sold for less than what’s owed on the senior note and you receive nothing as a result of the foreclosure.

Your only other option is to sue (withheld) based on his personal liability under the note, but again the costs of litigation will outweigh the benefits and even if you get a judgment against (withheld) he may have no assets you can seize to satisfy the judgment.

Since I am a paralegal I can do some of the legal work myself…Any advice? or am I just screwed?

Howdy Catshazam:

Is the home the buyers homestead or is it investment property?

You can get anyone to be a substitute trustee and foreclose on the deed of trust. It is simple to assign a new trustee. You can get your cousin or dad or sister or a friend or even another re investor. Did you sign a subordination agreement when the 1st was refinanced? Is your deed of trust recorded at the courthouse?

You do not have to pay off the 1st mortgage if you foreclose on the 2nd. They may even foreclose before you if they are not being kept current.

You however may not have much equity in the property expecially considering the condition of the property after you get the buyer to vacate the property. They are going to be stubborn and not make payments to the first lien holder and will tear up stuff and leave a mess. It will take you at least 3 to 4 months to physically have the constable remove them from the house, and longer if homestead.

Figure $500 for the foreclosure plus the fix up expenses and the past due mortgage payments to the first lien and see what else it will cost you and see if it is worth the hastle and costs. Be glad to help more if needed.

Thanks for your reply, I see your from austin, I used to live there about 6 years, some pink apartments on 4th street called the railyard, now they are condos I hear. anyway thanks alot for the reply

Heres your post with my answers

:DHowdy Catshazam:

Is the home the buyers homestead or is it investment property?
Homestead
You can get anyone to be a substitute trustee and foreclose on the deed of trust. It is simple to assign a new trustee. You can get your cousin or dad or sister or a friend or even another re investor. Did you sign a subordination agreement when the 1st was refinanced?
No but the first refi was recorded and I recorded the second AFTER the REFI.
Is your deed of trust recorded at the courthouse? Yes

You do not have to pay off the 1st mortgage if you foreclose on the 2nd. They may even foreclose before you if they are not being kept current. Really? the Lawyer told me i would have to pay off the first, first. see above, how would that work?
You however may not have much equity in the property expecially considering the condition of the property after you get the buyer to vacate the property. They are going to be stubborn and not make payments to the first lien holder and will tear up stuff and leave a mess. It will take you at least 3 to 4 months to physically have the constable remove them from the house, and longer if homestead.

Figure $500 for the foreclosure plus the fix up expenses and the past due mortgage payments to the first lien and see what else it will cost you and see if it is worth the hastle and costs. Be glad to help more if needed. I would love to take the property back. I had 10 other buyers waiting ot buy it, the person in it was the first one to meet my requirements. I think he refied for 25k. I could sell it for 35 owner finnance easy.

You would not have to pay it off to foreclose on the buyer. You probably would need to refinance soon unless you get permission to assume the loan from the lender. Let them know you are the second lien holder and are foreclosing on the property. They may let you start making payments or give you some time to pay them off. Usually a foreclosure sale will trigger a due on sale clause in the deed of trust and the lender could call the note and foreclose. If this does happen at least you would have some time to get your financing together.

Also if it were a friendly foreclosure you could take over the loan subject2 and start making payments on the loan. This does not sound like the case however. You could also get the deed in lue of foreclosure but this too may be a lost cause. It could be worth asking .

On the issue of foreclosing-you can get trustees of Texas(in Austin) do it for about $400 in most any county.

On the issues of paying off the first- The loan probably has a due on sale clause. That would allow the lender to call it due if it sold at forecllosure to you. Reality, they probably won’t if they get paid. You don’t have to formally assume the loan just get their ackowledgement that you are going to be making the payments.

Liability question- any court suit will cost you thousands-win or lose. My attorney want 5K as a retainer.