Sold my 1/2 of investment property to my partner and now he's filing BK

In a convoluted mess but the jest is:

I was left 14 acres with 3 rental units on it by my Dad when he died. He was partners with a guy and each owned half of the property - my Grandfather’s name and the business partner’s name are on the deed and my Grandfather chose to make me power of attorney and leave it to me in his will so that I would not have to pay taxes on it, and could just inherit it upon his death as my Dad wanted me to have it. It was never surveyed and formally divided, just has two people on the deed. Before my Father’s death they had sectioned off 1/2 acre of it and did a seller financing/lease to own deal to a 4th unit (mobile home) and that buyer is still there paying on time.

In March of this year I sold my Grandfather’s half to the business partner (with my Grandfather present). I did owner financing and we filed a mortgage in escrow at the attorney’s office.

Fast forward to yesterday and I get a call from the business partner saying he has just been through an 8 day jury trial and in that trial he was sentenced a $420,000 judgement against him for a separate real estate deal he had with another person. He said he would not be able to pay me the mortgage payment this month (or any month hereafter) and suggested I start proceedings to do a voluntary foreclosure against him. He stated that he was meeting with the BK attorney on Tuesday and was going to have to file BK.

My question is how will his filing BK affect any foreclosure proceedings I might have? Wouldn’t the BK automatically stay any foreclosure? Could I not just do a Deed in Lieu and get the property back (and thus 1/2 the rental income back) and cancel the mortgage all together without having to take the long, slow, legal route of a formal foreclosure? If I do the DIL - do I need to file the paperwork before his BK is filed?

If he Bankrupts, wouldn’t they order the sale of the property since it is considered an asset of his? The property is owned outright and I was only selling him my 1/2 of the interest in it. Could I refuse to sell and request that they split up the acreage and allow me to keep my land with the property on it?

TIA for any answers. I told you this was a convoluted mess!

What was pledged as collateral for the loan – just half the property or the whole thing? If you foreclose, could you end up owning the whole thing?

Your next step is to contact your attorney for guidance and to protect your interest in case the BK is filed.

No collateral. He was already on the deed as 1/2 owner - we just sold him our 1/2.

I called my attorney yesterday and have an appt next week. He said if I could get the partner to wait 60 days before he files BK, we can start foreclosure proceedings and hope it goes through smoothly. He said the BK could possibly put a stay on the foreclosure though and it would be up to the trustee on whether or not they let it go through. He said if he files BK before a foreclosure, I would be first lien holder on the property and the court would probably force the sale of the property and any proceeds would go to me first, then the judgement.

The problem now with trying to foreclose is that since there is a judgement, there is already a 2nd lien on the property I suppose. I don’t know. I question whether they can put a lien on it since our name is still on the deed?

Foreclosure will wipe out the judgment lien on the property. I doubt that you are still on the title since you sold your property and accepted a mortgage to secure the loan you gave.

Foreclosure does not mean that you automatically gain possession of the property. The property could be sold to a third party at the courthouse auction and the proceeds of the sale will pay off the loan you gave the former business partner.

Your attorney is in the best position to guide you from here on out.

This is a legal matter that you need to take up with a lawyer.

Thanks to both of you for your help. I’ve got a meeting with an attorney on Wed. so hopefully we can start the process to get something resolved. UGH, what a mess!

Good luck hope you get it resolved.

Update:

Retained an attorney and he has ordered title search which came back clean. Mortgage is for entire property so once DIL is signed and recorded, I will own 100% and the business partner will have no interest (thus no lien from his judgment - he has appealed the verdict and has a new trial date set for 10/1/09 so the judgment is void at this point).

Attorney suggested that once the DIL is complete, I set up an LLC and have everything underneath that umbrella.

So looks like I will be a landlord again. All 3 units are currently occupied and the property is currently listed with a real estate agent. I’m assuming his contract with her will cancel out once the DIL is done, or could it transfer over to my name? I would like to sell the property as my Husband and I both have full time jobs, 5 children between us, and don’t even begin to have the time it takes to maintain the property since it is 50 miles away from where we live (that’s why we sold out in the first place).

Also, question about taxes - Originally it was left in my Grandfather’s name with him gifting me the mortgage. I would have just paid taxes on the interest I collected. Now with the mortgage wiped out and my name being put on the deed, what is my cost basis on the property? Would it be what my Grandfather paid for it 15 years ago, or what it is worth today, or do I have to pay taxes on the whole kit and kaboodle when I sell?

Best to have a trusted tax professional answer the cost basis question for you. It is not really clear that you sold the property with seller financing, or that your grandfather sold the property and you inherited the mortgage.

Until you resolve the qustion about what you actually owned and/or inherited, you can’t really answer the cost basis question. Your attorney should probably review the entire deal, to include the chain of title, to determine just what you actually inherited.

If you inherited the mortgage that your grandfather accepted when he sold the propery, your cost basis in the property may simply be the amount of defaulted debt plus the cost to reacquire title.

Let the legal and tax professionals get you to the correct answer.

When all the dust settles, if the property is a cash flow generator, why not keep the property for rental income and for the tax benefits? You can always hire a professional property management company to deal with the day to day management issues.

My Grandfather sold the property and “gifted” me the purchase money mortgage. He is still alive so it isn’t really an inheritance, but a gift. My attorney said that since the mortgage was assigned to me, once the DIL is done I will own the property. You’re right though, I’m afraid I am going to need a good CPA involved in this one.

The only way I could keep the property is if a property management company handled things for me. My Husband and I tried all last year to keep it up but we just couldn’t do it. The units are mobile homes which are older and need ALOT of work. It is only a max cash flow of $1300 a month between the three so I’m not so sure that keeping it and paying the property management company would be worth it? What is the average rate for a property mgt company?

A property manager can typically charge anywhere from 5 up to 10% of the monthly rent, plus additional fees (i.e. leasing or advertising services). This will obviously depend on who you choose to work with. However, it can definitely be worth paying a little more if you will be receiving excellent management and integrity in return. Your best bet is to call a few different companies before making your final decision.