PA - Huge problems with sellers. If you like to solve big issues, read this, it's a good one

[Everything-A-Fight]

Where do I even start???  First and foremost please understand that we fully understand that we should have never gotten into this real estate deal in the first place and that we should have been more informed before signing the sales agreement. However, at the time, it seemed like it would be OK. We were wrong. Anyway....

We have a sales agreement to buy the house we now live in. We entered into the agreement to get a mortgage after a period of time but for now we have a lease to live in the house.

Now were in the process of getting the mortgage and through my own investigation I found two judgments for a total of 17k against one of the sellers from a credit card company. The sellers were married when they went on the deed originally and when they entered into the contract with us. Between contract start and now the two have fully divorced.

I read that in Pennsylvania having both of their names on the deed when they got the house originally creates a Tenancy in Entirety and furthermore bars a creditor from causing the sale of the home, and it seems it protects the sellers equity through sale of the home because of the Tenancy in Entirety status. 

Here's what I know now: The sellers did not refinance the house into just one of their names, and definitely are both responsible for the mortgage still.

Their divorce papers do not contain a marital settlement agreement of any kind. I'm not sure if maybe it just wasn't scanned into the system or perhaps that portion is not public record?  Regardless, the mortgage is in both names still.

I read that divorce automatically breaks tenancy in entirety and therefore those judgments can now be enforced if they desire. However I'm thinking that's only true if there was no outstanding mortgage now, or they had refinanced to just one of them, or at very least the creditor could only collect from the proceeds of the sale that the person with the debt receives? Can anyone confirm any of that?

I also understand that the sellers are obligated to us to settle those liens to give us clear title, but they don't have any money to do that and they have negative equity and will still have negative equity at time of sale unless we agree to increase the purchase price.

Yes, we know its a terrible situation but its our situation and walking away is not an option at all. We have a lot of money invested in this already.

So here's what were down to. Can the sale go through with those judgments against the one seller. The seller will have zero proceeds at the time of the sale so there's nothing for the debt collector to get.

Does the debt collector have a reason to keep the lien in place after sale? 

I can't fathom how if the tenancy in entirety is broken by divorce how it would benefit the debt collectors if the sale will have zero proceeds.

Also I have a professional title search being done as of today but I'm wondering if title insurance can can be placed considering the circumstances.

Any help will be appreciated.

EAF

[StartingOver10]

Welcome to the forums Everything!

Congratulations on your contract. I know it seems to present a problem at the moment, but it may not be as bad as it appears at first glance.

You hit the nail on the head with the PSA (Property Settlement Agreement). Those are not public records but the seller would have to have one to complete their divorce given that there was marital property (not just the house). I am assuming that there was at least one attorney involved in the divorce procedure.

The sellers have to clear the lien with or prior to the sale of the property. Is a title company involved at all? How do you know the balance that the seller owes on their mortgage? The recorded amount of the original mortgage remains the same in the public records but as it the mortgage is paid, the balance decreases. Some sellers accelerate their payoff. This is especially true for HELOCs where the entire line is recorded, but the borrower may even have a zero balance. The title company obtains estoppels for each of the mortgage liens and other liens as applicable. Until you have an official estoppel it really isn't possible to know if the seller is upside down. I have seen seller's misquote the amount that they owe in contract negotiations thinking that this means they will get a higher price for their property. Naturally this shouldn't be a factor at all in negotiations, but for some reason some seller's believe it impacts price. (Strange, right???)

The seller would not be able to deliver the house to you without clearing the lien either at closing or prior to closing.

The seller can negotiate with the lienholder to pay X and remove the lien. This becomes more difficult if the lienholder knows that there is a contract and imminent sale because they will then want the entire face amount plus whatever interest has accrued. The interest on judgment liens is regulated by your state's statutes. If the title company contacts the lienholder, then for sure the lienholder will become less negotiable because they will know a sale is in the works.

It is in the seller's best interest to negotiate the payoff and get a Satisfaction/lien release prior to the sale.

Also, the seller may have access to other funds to pay off the lien and whatever short fall may or may not exist on the property. Those funds can come from the seller, the relative of a seller, the sellers investment accounts etc.

If, after you determine the true outstanding balance of the liens and mortgages on the property the seller can not clear these amounts from the sale proceeds or other funds, then the seller or the sellers rep would need to negotiate a short sale with each lien/mortgage holder. A short sale needs the cooperation of all of the lien holders and mortgage holders in order for the sale to close as clear title must be delivered to the buyer.

For the title search you have ordered, you will get a Schedule A and Schedule B with exceptions. Pay careful attention to the exceptions. Have the title rep explain in detail what each exception means to you. That is were you are going to find all the liens on the property.

[Everything-A-Fight]

Thank you for your fast and thorough response.  This is really an awful situation to be in, especially beacuse there are so many other things we have been through with the sellers. Just total greeed everr time they are contacted.

I'll try to answer all your questions.

Re: Property Settlement Agreement or Marrige Settlement Agreement. 

Accounrding to the notice in the newspaper the wife did the divorce papers pro se. If that is the case, I know for a fact that the divorce packet you get from the County courthouse does not state that there is a PSA or MSA required. In fact there is a waiver that says that if you do not act on a particular form before a divorce decree is entered 'you may loose your right to division of property, assets, etc.....' I used the same form, pro-se, and almost went through without the MSA but in mentioning to my lawyer during another situation she said I had to have one. I got the decree. In my case I would have been better off without.

I'm wondering if the seller did not have a PSA/MSA, and if that is the case, does that help us at all?  The other factor is that they divorced but continue to live in the same house, and presumably the same bedroom and bed. It feels like they divorced to cause these adverse actions and or in order for him to qualify for diability benefits without declaring her income. I'd like for it to be that because they don't live apart that they still have the tenancy in the entierty protection. That seems like it would allow the judgements to not hold up clear title then. 

As far as the mortgage balance goes I'll just have to say I have a way of knowing with 100% certainty that the mortgage will be negative equity and the seller will owe around 2k above the at the projected close date.

There's no chance of the seller getting assitance from friends or family.

Maybe the short sale option could work, I guess I need to wait and see what the title search comes back with.

Thanks again, any feedback is appreciated.

EAF

[StartingOver10]

You might want to consult with a real estate attorney. Usually the title company has an attorney available, but generally you don't get a chance to speak to them because the paralegals handle the communication. Once you get the title work back, it is worth your time to at least ask these questions you brought up with the attorney. If he isn't available, consider calling a good real estate attorney and paying for an hour of his time to get your questions answered.

I know this: having a $2k shortfall + seller's contractual closing costs is still considered short. The banks will do a short sale with a very small shortfall, but the seller would have to provide a tremendous amount of documentation (tax returns, pay stubs, hardship letter, all the documentation needed for a regular short sale). It will take on average 60 to 120 days to do the short sale from contract to close. For some seller's they don't want to provide that info and will find the $2k + closing costs.

[Everything-A-Fight]

Thanks again for another thoroughly response. 

We do have a real estate attorney in the works right now but we've found they won't generally speak on the hypothetical too much, which I understand because it can be a waste of time, but in this situation where there's an obvious lien I would have liked to have spoken about how to approach this problem more thoroughly, but the attorney wants to wait for the title search to come back.

I'm sure a lot of clients are pains in the rear, but having the need to be a client means you're already in a anxeity filled situation, and it seems like attorneys like to ramp up the drama on situations. Do they teach this method in law school?  Feels like it.

The current bank has already said they will not accept a short sale request because the loan is essentially current, and I'm sure they realize the mistake the seller made by agreeing to a purchase price that is below what they owe.  The seller never intended to pay extra on the mortgage to ensure a proceed in the end.  When it's all over I'll be sure to post about all the details, as a warning to anyone contemplating what we are doing. 

How crazy is it that you can leagally enter into a lease with requirement to buy by a certain date but you can't mark your place in line with the recorders office like a debt collector can. I'm still lost on how you could protect yourself in this situation.  Lesson learned here is even with a regular timeline purchase a debt collector can step in right after you sign the agreement to buy and then you're essentially screwed.

As for the seller finding the money, it just won't happen. They have nothing. It's not like it's even a charity case situation, they're just dishonest people. I really feel like the divorce was calculated like I said, and at very least in order for him to be approved for disability benefits. But we've found out in the pas that no one really cares about government assistance fraud if you report it.

EAF

[StartingOver10]

Lol about your attorney theory. I have the same theory about them (in general) More drama = more time on your file = more money for them.

As to the rest, sounds like a bad situation. Are you getting a relatively good deal? You won't know if the deal is good in comparison to the neighborhood without an appraisal or at least comparable sales. So if you don't have an appraisal yet, contact a Realtor for comps.

If its a good deal for you*, consider what you would do if the deal fell apart. There is a cost to keep it together and a cost to have it fall apart. One part of this purchase is the financial part. Another part is the emotional part. Only you can determine what to do once you have all the facts available to you. Maybe the seller can throw something else of value in the deal that would make it worthwhile to you. I don't know. It will be part of your equation of what to do to either keep the deal going or terminate it.

*The term 'good deal' is very subjective. I know buyer's that are looking for the deals that were available in 2011 but they want that same deal today (2/27/2014). Is that likely? No. For that buyer there will never be a good deal unless our economy tanks again. So define what is a good deal to you first and don't do the "would-a, could-a, should-a" deals that many people wait for....

[coterotie]

The only way you could have protected your position was to have done a contract for deed and recorded the deed.  Now this would likely have triggered the due on sale clause of their mortgage, but the gamble would have been whether you could get the mortgage closed before the mortgage holder could get all their ducks in a row.

The judgment holder would have had no recourse to the property.

I would really press the sellers to be ultra co-operative and cite the fact that they may have committed a fraudulent conveyance in leading you to believe they could deliver clear title knowing the judgment was possibly pending.

As to your attorney comments, the actual first class taught in law school is procrastination.  The second class is the ability to write and bill for a two page opinion letter that gives no clear advice or opinion and ends with the sentence:  "in the end it is a management decision or it is up to the client to make a decision on which action to pursue."

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@Everything-A-Fight wrote:

Thanks again for another thoroughly response. 

We do have a real estate attorney in the works right now but we've found they won't generally speak on the hypothetical too much, which I understand because it can be a waste of time, but in this situation where there's an obvious lien I would have liked to have spoken about how to approach this problem more thoroughly, but the attorney wants to wait for the title search to come back.

I'm sure a lot of clients are pains in the rear, but having the need to be a client means you're already in a anxeity filled situation, and it seems like attorneys like to ramp up the drama on situations. Do they teach this method in law school?  Feels like it.

The current bank has already said they will not accept a short sale request because the loan is essentially current, and I'm sure they realize the mistake the seller made by agreeing to a purchase price that is below what they owe.  The seller never intended to pay extra on the mortgage to ensure a proceed in the end.  When it's all over I'll be sure to post about all the details, as a warning to anyone contemplating what we are doing. 

How crazy is it that you can leagally enter into a lease with requirement to buy by a certain date but you can't mark your place in line with the recorders office like a debt collector can. I'm still lost on how you could protect yourself in this situation.  Lesson learned here is even with a regular timeline purchase a debt collector can step in right after you sign the agreement to buy and then you're essentially screwed.

As for the seller finding the money, it just won't happen. They have nothing. It's not like it's even a charity case situation, they're just dishonest people. I really feel like the divorce was calculated like I said, and at very least in order for him to be approved for disability benefits. But we've found out in the pas that no one really cares about government assistance fraud if you report it.

EAF

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[Everything-A-Fight]

I knew it, I knew it, I knew it.... I just didn't know it was the first and second class they took.

The overall view I've picked up is attorneys want to settle. Settling is cheap, easy work to perform for them. 

That explination about balance between settling and litigation is great too.  If we can settle this then you'll get some money; if we have to litigate this you'll win but there won't be much money.  You're forced to settle due to the supposed costs involved. I understand it's a free market, but come on.

This is the case over and over with us, we get into a situation that if the other side had morals the transaction can proceed and conclude nicely. Apparently only the people with nothing to lose enter into such contracts anymore. These sellers have ultimate power in this situation because they have no assets to lose.

How did it get this way that the people with the least have the most leverage.  We're paycheck to paycheck middle class people with jobs, not career paying jobs, and we play fair. Then people crap on you.  What a nightmare this has been, and continues to be.

I can't wait to vent about the whole process (hypothetically of course) after the closing. The whole story is a real page turner.

Thank you everyone for your rational insights.

Edited after posting:  Yes, I believe you're right that the current mortgage lender would have expected payment right awy.  I wonder why they would do that? Because what's happeing to us happens and they know it?

EAF