Challenging Title Issues, But Deal Looks Great!
Looking at buying a semi-absentee nearby small business--building, land, & equip. included--with very motivated sellers. Owner financing definitely possible. Needs some fixin'. Owner 1--"Sue" sold to Owner 2--"Chip" two years ago. Chip hasn't put the time or maintenance into it that it needs, and he no longer wants it. He barely keeps it open, and revenues have suffered. Chip bought from Sue on CD (that included some other personal collateral of Chip's, so I can't just assume the note) with a balloon due soon. Sue wants him out., too, but apparently they still get along OK. Few years of taxes are unpaid, not in danger of forfeiting.
Chip's interest (his CD) was never recorded; back taxes owed prevented it. Sue did, however, record a fixture lien on the business's equipment--for half of the business's value-- apparently to prevent Chip from selling off the equipment to raise cash. So the title is still in Sue's name, and there's a fixture lien as well, basically it's on herself. What the heck?!? Didn't know that was possible
So that's the drama. I wouldn't bother but this business has good potential, and is available pretty cheaply, though I need to negotiate a low down payment. I suppose I should cut a deal with Sue, one that hinges on getting a Quit Claim from Chip to get him out of the picture--even though he only has an unrecorded CD--but how can I best protect myself as I ponder buying the place? The back taxes--substantial--would need to be paid before I could even record my interest. And if I buy it with the lien, how can I be assured that Sue would ever release it? She's down on anyone ever actually wanting to buy and run the place. I want to make an offer soon and get this place humming again! Any ideas?
I'm not sure if I follow everything here. But, as I understand it -
your downpayment would cover the back taxes (assuming they are real estate taxes) to clear that up. It should also cover the equipment, inventory, etc. Chip would sign a QC deed for the real estate and also a general release to get him out of the business end. A bill of sale for the equipment might also be in order. Sue sells you the property on the Contract for Deed. She also has UcCs filed to protect her against you selling out all the equipment.
That's VERY basic. An attorney is definitely needed to be sure she can sell you everything free & clear, to protect her interests, to protect your money, and to be sure Chip is removed properly.
Don't misunderstand the rights of Chip and his creditors, and the continuing rights of Sue and her creditors, just because the contract to Chip is not recorded. Chip is still the legal owner, and the contract with him is just as valid.
It is possible to go forward in several ways.
The safest way is to obtain your own financing and pay Sue and Chip for deeds. If you prefer to continue financing from the seller, there are two parties, both Sue and Chip. If you can pay for Chip's interest, you would pay Chip for his equity then assume his contract obligation to pay Sue. That would typically be done by a deed from Chip and an assignment from Chip of his rights in the contract with Sue.
You could buy from Chip on a wraparound contract (you enter into a new contract with Chip to pay over time; Chip is still obligated to pay Sue). Very risky, because you have no direct rights with Sue, and you must structure remedies and procedures to anticipate Chip's failure to pay Sue.
To avoid problems with your rights remedies if Chip fails to perform, you should propose to buy from Sue directly. That would require Chip to rescind his transaction (cancel is contract to buy from Sue so she is again the property owner.) You then proceed to enter into a new contract from Sue to you.
It is not wise to purchase a real estate interest without recording. Apparently in your area that requires payment of taxes. So don't proceed unless you have the cash to pay whatever is needed to put your interest in the public records. Without recording, Sue or Chip could improperly create a new purchaser or lien that could gain rights over you simply by recording first.
It is possible for Sue to improperly act as the owner disregarding the contract, creating a new lien or another purchaser's rights, since Chip has not protected his rights by recording his contract.
There could be leasehold parties who have perfected rights, although Chip's rights and the leasehold rights are not recorded, simply by possession that is apparent by inspection of the property.
You should not proceed without title insurance that insures your new interest over the many rights now possibly created by both Sue and Chip.