So a month after we buy the property, the seller calls us up and goes, hey, I just want to let you know that you might be getting a call from the IRS. How do I protect myself if the seller is going to file bankruptcy? Guys, welcome back to another video in the Creative Finance Series with Pace Morby. Boom.
We are just cranking out these videos and we're sitting down here together and we've compiled all kinds of questions that have come up in the first 20 videos in the series. And we're going to specifically nail down, Pace, this question. There's a couple variations of this.
It's around land contracts, which is a form of an executory contract, right? This is video 10, right, Tyler? That this video, you and I went into detail about executory contracts. Some states call them a land contract. Maybe we could do like a really quick overview.
Go watch that video where Pace really breaks it down in detail. But the question here is around protecting yourself. In a land contract, because a land contract, you haven't actually transferred that ownership.
The deed hasn't transferred. It's kind of on standby. Well, what happens if things happen, like maybe a bankruptcy? How does someone protect their interest in that property in this kind of situation with a land contract is the question. I think we've seen some variations of that.
Yeah. So land contract, contract for deed, bond for deed, seller carryback, installment sale, agreement for sale in Arizona. There's about 14 of the names, but they're all underneath one umbrella called executory contracts, which means, and some people have done this, some people haven't done this in their life, but you're a blue collar dude like me.
So you probably bought some cars with cash in your life. Okay. Like a $500 car, a couple thousand bucks when you're young. And my kids.
And your kids. Okay, cool. So what you, or a motorcycle, right? Yeah. So what happens is you'll go to the seller.
You're the seller. I'm the buyer. I give you cash. You give me what?
An agreement. You give me a title. Okay.
And you sign the title. Yeah. Do I have to sign the title?
No. No, I don't. I could, think about this. I could hold onto that title. I now possess the title, even though I haven't recorded it in my name.
I could hold onto that title and I have possession of the title and possession of the motorcycle. Therefore I am the owner of this property. That's called an executory contract.
An executory contract means I have not executed the deed or the title yet. It has not been executed. Therefore, it's an executory contract. Okay.
Same thing with a lease option. A lease option is a form of an executory contract. It means I'm leasing a property from Jerry and I have not executed my option to buy that property yet.
So it's still an executory contract. I have not executed the contract completely. So in a motorcycle or car transaction, I have the title.
Jerry has signed it over to me. Nowhere am I required to sign anywhere on that. I just go down to the MVD and go, this dude just signed this over to me and I want this transferred into my name.
So that's an executor contract. And you can do this with houses, which is amazing. The reason why you use an executor contract is a variety of reasons.
Go back and watch video number 10 in our playlist. It's one of my favorite strategies. It's to get around the do on sale clause.
100% you'll never worry about the do and sell clause with an executory contract. It's to also help get around down payment assistance issues and a handful of other things as well. I told a story about April Juliano, one of my students that used one and made $400,000.
She used it so the HOA didn't know she was the buyer of the property because the HOA hated that property. And she's like, how do I avoid the HOA seeing I'm the new owner as I'm renovating the property? I go, easy. You're in Florida.
Use a land contract. And she's like, Oh my gosh, so amazing. Okay, so that's a land contract or an executory contract. Now, in a house transaction, let's say I buy the house from Jerry.
Jerry signs it over to me. He signs the deed. Okay, so the deed is signed over to me. It has been notarized.
It's all documented. I simply choose not to go down to the county recorder's office and record the deed. This is now an executory contract. I do this to avoid due on sale clause. I avoid it to do all the things that we talked about in video number 10. There's a reason why you use executory contracts.
However, let's say that Jerry goes and gets in a fist fight with somebody over, like, I'm the one that shot the iguana out of the tree. It's not your iguana. It's my iguana. And they're fighting after an iguana and they get into a fist fight. This guy sues Jerry and finds out that Jerry is the one that's still on the deed of this property.
Got it? I bought and I hold the deed to. This guy could sue, win a lawsuit and get a judgment against property that Jerry owns.
Okay. Or Jerry could get into a, Jerry could get into a divorce. Jerry could get into a bankruptcy.
Jerry could get into a mechanics lien on another property of his or something weird could happen. Or he could have credit card debt or an IRS debt. Okay.
I'm so glad that today is this... This is the topic because I have a great story for this. Something that just happened. You always have a good story.
It's a good story. So, I bought a property from a seller who bought a property on... They bought a property with down payment assistance.
A year later, they decide, we need to sell this property. We don't have equity. So, I just bought it subject to. Okay. However, I can't buy it subject to and record the deed.
That's the difference between a land contract, not recording the deed and subject to is recording the deed. That's the only difference between the two. We got the deed signed over to us.
We then go and put it in a safety deposit box at Chase. I have a safety deposit box with deeds. I don't know, probably this thick of deeds in one safety deposit box.
And anytime I do an executory contract, I put it in a safety deposit box. What I then do is I take a copy of the contract, I take a copy of the agreement, and I take a copy of the actual terms of that agreement, and I record a lien against the property in my company's name in the form of how much money I expect to make on this property. So the lien I do, let's say that I go, okay, I bought the property for 300. I'm probably going to sell this property in 20 years for a million.
So I'm going to go put a lien against the property. that the seller has given me permission to lean, I'm going to lean the property for a million dollars in my company's name. What does that do for me? Clouds title.
Clouds title and protects me for at least a million dollars in a secured position on the property. So if somebody, an IRS lien, a mechanics lien, a divorce situation, some sort of encumbrance or another cloud comes on title, it's in third position. I'm in first position or I'm sorry, I'm in...
Yeah, I would basically, my protection would be above the IRS, right? Yeah. So a month after we buy the property, the seller calls us up and goes, hey, I just want to let you know that you might be getting a call from the IRS.
My previous business is getting a lien against it and they're going and attaching it to our properties. They attached a seven... million dollar lien against a property I purchased on an executory contract. This just happened. The great thing is we pre-recorded our future profit in a lien on that property with all the documentation legally.
And so no matter what happens with that $7 million, I don't care. When I go to sell that property, I will get my profit on it before the IRS ever gets paid. I can go refinance. I can do a whole bunch of things with that lien, even attach the property. I can go sell it.
I can go transfer it to a different company. I can do a bunch of things. My interest is protected on that property because of the way that I set it up. Smart.
And that lien record, is that lien done at the same time as the executory contract, like all part of the closing? It's all part of the closing. Yeah.
So then it's all happening all at once. Yep. So my transaction coordinator, Molly, will do all of that paperwork and handle all this. I don't have, I don't deal with any of that crap. Right.
But that's the way that we protect ourselves. Yeah. The perfect sense.
Love that. What an easy solution. Yeah, very, very simple.
Just pre-record what your proposed profits. You could be a lunatic and go, I think I'm going to make a billion dollars on this. And guess what?
You can legally sign a lien against the property for a billion dollars if you so choose so. Yeah. The dollar amount doesn't even really matter so long as it's high enough to get out what you're hoping to get out of it, right? Because that gets paid off first.
So when you go to sell it, you get... you get your portion of the sale first. Any proceeds left over are going to go to whatever other liens need paid. Because lien, you have to understand lien is a priority. It's position.
So it's not like whatever money's left gets split out amongst everybody. No, it's priority. First priority gets paid first, whatever's left goes to second priority and so on.
So that's a great way to do that. Easy solution. Love that. I hope that answered that question for whoever that was.
Now we got another way to protect, right? This is the bankruptcy thing. So we got the second part of the question is how do I protect myself if the seller is going to file bankruptcy?
So Roy Polonso, 2533. I always wonder what is going through people's minds when they're creating their YouTube names? You know what it is? I'll tell you what it is.
It's their Gmail. It's usually the front of their Gmail. Oh, interesting.
That makes so much sense. Yeah, if they don't have a creator account, it's just their login. And they grab.
Oh my gosh. Because you know, they just pick a random thing. So they grab the front of your email.
I see. Okay. It makes a lot of sense. Okay.
So Roy Palonso 2533 says, Hey guys, is there a strategy to protect you as the buyer from losing the property in case the seller goes into bankruptcy? Will you be notified by anyone if that should happen? The answer is yes, there is a strategy. I've had this happen to me. I think five, roughly five times.
I can't remember where in my paperwork, my sub two paperwork, there is a clause in there that says, in the event of a bankruptcy, the seller is... Because it's always sub two. This is not a seller finance situation.
This is always, always, always a sub two situation. And it doesn't matter for seller finance. Why? Because there's no debt.
They don't have any debt. Yeah. Yeah. Now...
There will be such situations where in a seller finance situation, I almost want to answer the question on sub two and then go back to the seller finance, but now I'm already, yeah, I'll do that first. I'll come back to the seller finance thing. I'll tell you if the seller does file bankruptcy on seller finance, there's, here's, I'll tell you what happens. This has happened to me before.
So the, in a sub two transaction, the seller's name is still on the mortgage. So the seller's going to go to the bankruptcy court and they're going to fill out paperwork and they're going to list all their debts. And they're going to say, these are all the things that I have in my name. And even if the seller does not name the mortgage that you bought subject to on that list, a lot of the times the court will pull a credit report and see everything that they have on their name.
They'll see he has an asset in his name, at least the mortgage. And then what they do is they see that his name's no longer on the deed and they ask him, okay, that was the first time this happened to me. The judge was like, what's going on here?
Seller. seller says, I bought, I sold that thing two years ago. I sold it subject to the judge goes, okay, so you don't own the property. No.
Okay, great. And they waived, they cross it off. But there have been other situations where I have gotten letters from the court saying the seller actually put the mortgage in the bankruptcy as, oh, I want to file bankruptcy on this. And I called the seller.
I go, why'd you do that? He goes, oh, dude, I've honestly, I forgot I sold the house to you. I forgot I sold the house to you.
Okay, great. Or didn't understand, just listed stuff. Right.
Just listed everything. Or they hire a bankruptcy attorney that does all of it. They pull everything that's in their name on their credit report and go, we're just shotgun effect. Let's just get rid of everything. Let's purge it.
So what we had to do in that situation, we had to go and tell the judge, hey, we bought this property. Here's the documentation. And they remove it from the bankruptcy hearing. That's it.
You can pick and choose what you're filing bankruptcy on. You don't have to file bankruptcy on everything. You can say, I'm, I, I'm not filing bankruptcy on my house or on these things.
I'm filing bankruptcy on these things. However, in the bankruptcy hearing, they'll say, do you still own these things? Because if you do, we're going to require you to sell them and get the money to pay these other creditors. But when you show that you've already sold the property and the deed is in your name, or you did an executory contract and you recorded a lien against it showing that you did buy it on an executory contract, it gets removed from the bankruptcy hearing. It gets omitted.
This happened to me four or five times. Never seen somebody lose a house subject to through bankruptcy. Never once. So it's just dealing with it when it comes up and showing the proof and you're good. We had a seller that sold, this has only happened to me one time, but I had a seller file bankruptcy when they sold it to me on seller finance.
It was like three years after going through a divorce. He's like, screw it. I'm just going to file bankruptcy.
I'm just going to start from scratch. Files bankruptcy. So what happens to the seller finances note? Goes to a receiver of the court.
So now I no longer make my monthly payment to the seller. I make the monthly payment to the receiver of the court. The receiver of the court takes that money and pays the creditors monthly payments based on my money coming in.
Because that's just income coming in that they're now going to, now they're going to decide how it's distributed. Right. So they took the note.
They called me up. We restructured the note to go as the receivership of the court. And the servicing company was updated on everything.
And I make a payment to a receiver instead of a seller. But it didn't affect your note in any way. No.
Because you're... No. This kind of stuff will happen. Yeah, it will happen.
Well, yeah. I mean, you're dealing with distressed sellers in a lot of situations. So things like that happen. Yeah, that's an interesting way to put it. It's like once a distressed seller, usually they're going to make the same types of decisions or same things are going to happen over and over in their life.
They're kind of like repeat offenders, right? It's kind of like... Sometimes, yeah.
Sometimes what you'll see in people that go into foreclosure, you'll see them go into foreclosure, come out, go back into foreclosure, come out. And usually it's like five or six times. And then finally, like, what am I doing? I'm just going to let the house go.
You'll see that happen all the time. And so people that get into distress situations typically will find themselves back there. I shouldn't say typically, oftentimes it will happen. But that's how you protect yourself.
You get notified because you're the owner of the property. Nobody can take property that you own and a debt can't be cleared out on a property that you own without the judge or... the receiver of the court knowing and notifying you that it's happening.
So yes, you'll get notified. Awesome. Great. Well, man, that's all those easy. I thought it was going to be trickier pace.
Yeah, there you go. That's all there is to it. Great guys.
Well, I hope you guys liked that one. We're going to continue to answer questions, commonly asked questions and concerns that people have around creative finance. We've got the one and only expert, one and only, the number one, maybe not the only, but the number one. I think I'm number two. Jerry's got to be number one, dude.
And guys, we've got some great resources. If you want some stuff to help you get going with creative finance, also check out paceandjerry.com. If you go to that link, what'll happen is you can put your email in and you can do a strategy call with Pace's team. They're going to sit down with you and talk to you about if creative finance is something that you really want to make. a business out of and do on a big level and really, you know, make a lot of money helping sellers, learning the ins and outs and going out there and doing it, then you can be part of that community.
Again, go to paceandjerry.com and check that out and watch for the next video. We put all these videos in a playlist series here on the channel so you can go back and reference them. They're all there and we're going to probably over time keep adding to this because, you know, we keep coming up with.
Things that people want to learn about. So we'll do content around that. Thank you, Pace, for your time doing that.
And guys, we'll see you on the next video.