Creative Finance Series: Protecting Yourself in Executory Contracts

Introduction

• Video in the Creative Finance Series with Pace Morby.
• Focus on protecting yourself in transactions using land contracts (executory contracts).

Executory Contracts Overview

• Definition: An executory contract is an agreement where the deed or title has not yet been transferred.
• Common Types:
  • Land contract
  • Contract for deed
  • Bond for deed
  • Seller carryback
  • Installment sale
  • Agreement for sale (Arizona)

Benefits of Executory Contracts

• Avoidance of due on sale clause.
• Helps with down payment assistance issues.

Protecting Yourself in Executory Contracts

• Recording a Lien:
  • Pre-record future profit in a lien against the property.
  • Example: If expecting to sell for $1M, record lien for $1M.
  • This protects against encumbrances like IRS liens or mechanics liens.
• Lien Priority:
  • Liens are prioritized; first priority gets paid first before others.

Bankruptcy Concerns

• Sub To Transactions:
  • Clause in sub two paperwork addresses seller bankruptcy.
  • If seller files bankruptcy, the court may initially include the mortgage.
  • Buyer can inform the court of previous sale to exclude from bankruptcy.
• Seller Finance Transactions:
  • Mortgage payment redirected to receiver of the court if seller files bankruptcy.

Real-Life Example

• Scenario where IRS placed a lien against a property Pace bought on an executory contract.
• Pre-recorded lien protected Pace’s interest.

Handling Bankruptcy Notifications

• Owners are notified if their property is involved in a bankruptcy process due to debt.

Key Takeaways

• Always protect potential profits by recording a lien.
• Bankruptcy of a seller doesn’t necessarily affect the buyer’s ownership if documented properly.

Conclusion

• Creative finance strategies are essential for managing risks in property transactions.
• Resources:
  • Visit paceandjerry.com for strategy calls and more information.
  • Watch series playlist for more insights on creative finance.