This is Rick Harmon and welcome to the Gordian Knot Show. In this episode I want to give you a little bit of the inside baseball experience that I’ve had and how I came to become comfortable with title problems as they relate to California property and how you might look at them differently in the future.
It all started back late on a Tuesday, after hours. A few minutes after five I get a call from a would be borrower. They had a mess. Actually, they wanted to sell the property. They didn’t want to get a loan.
It turned out this particular property had not one, not two, but five different mortgage loans at the time, now this was almost 30 years ago, totaling about almost a million dollars against the property.
It was a complicated file. There’s no question about it. There was a lot of things going on here and it wasn’t a probate, but as it turned out, the title issues that were on this property seemed to be well above the scope of what I understood at the time. And as it turned out, I have to confess that I was not anxious to be dealing with someone else’s title problems.
This is what I discovered. There was a first mortgage on the property to a bank, a large bank, Bank of California and no longer in business to my understanding now, but this bank had made a mortgage on the property many years before.
There was a second mortgage to Bank of America, obviously still in business. But that mortgage was an SBA loan. And as it turned out, was actually cross collateralized with another property.
And then there were three other loans that were made to family members. A third, a fourth, a fifth loan. All these loans totaled up to almost a million dollars. But there was no way anybody was going to do anything because at the time the property was not worth anything like that.
So now the question is how do we solve the problem for someone who wants to sell a property, has all these liens against it? Well, I it wasn’t going to be simple and I’m not sure what fascinated me about it, but I talked to the owners who would now become the sellers and I liked the property. My impression was this would be a great longterm property.
This was ultimately going to become a property that I wanted to live in and so now I had to solve these other problems because there was no way I was going to be paying a million dollars, and at the time I didn’t have a million dollars clearly to be able to do anything with this property.
This is what we did. We set about breaking it down. We broke it down and deciding what the various loans were, what the balances were and how we’re going to deal with them.
Now unbeknownst to me, there is a dispute among family members. The third was owned by an uncle and that same uncle had made a fourth mortgage to the owners, and yet another relative had made a fourth mortgage. But in the middle of it, there was a subordination agreement. I’d never seen one before. They’re not even common nowadays. But the subordination agreement had made the fifth, subject to a priority position in front of the other two family member loans, done voluntarily at one time.
So ultimately what we had to do, because the dispute was so heavily entrenched that we acquired the fifth mortgage and then we could not make any other further resolutions. So then what we did was we did a nonjudicial foreclosure on that loan and no one would buy it at a trustee sale. So ultimately the property reverted to me now that I owned the fifth, which was actually in third position. Did you follow that? Don’t worry about it. I didn’t either what I went to do it.
So I went to a friend of mine trying to make sense of how we were going to fix these title issues. And he found an old attorney that was in his mid eighties and he was old school. Just loved the guy. Mr. Gummerman. Mr. Gummerman was down in Orange County, I believe in Santa Ana, and he understood a problem that I had never seen before and never seen sense called a security of title, whereby the order of these liens was not clear to the outside world because some of the documents were not entirely recorded and others would not look at the subordination agreement that was recorded between the parties.
So what this all meant ultimately was that we found another way to clear title and did not involve the courts. Now this is good for a number of reasons. But what I was so impressed by Mr. Gummerman was he was not caught off guard by this at all. He was actually a referral by my friend Ran Johnson, who owns Trustee Corp and a number of other companies.
And what I discovered along the way was that not only was title something that I should not be worried about loathing anymore, because I was so disgusted and frankly very uncomfortable with real estate title issues. But I could actually use this to my benefit, to the benefit of my clients by becoming more familiar with it. And that’s when I made peace with it.
If you were a fan of the old ’60s movie, it was Peter Sellers, and I think it was Dr. Strangelove, and the story about the bomb and how I came to love the bomb. I think that was the subtitle is you understand that what seemed to be bad was ultimately good in a way. In that particular case it was really about neither party, neither side, blowing each other up.
But in the case of of the liens and title issues, what I discovered was that I could actually make use of this by studying title theory and becoming very familiar with it and taking practical applications, becoming an expert in California real estate title. And applying this and helping my other clients, and actually making this to work in a number of other areas. Has been not only very profitable but I feel very good because I found solutions where in the past, and prior to that time, there were no easy ways around.
Nowadays we find a lot of solutions can be done through quiet title matters, but a lot of other more practical solutions can be taken down in this very simple model of ADE aid, which is Asset Minus Debt Equals Equity. And so we’ve found ways that we could actually clear title or take lien holder positions in my lending position, in my lending business, and this has worked out so well that we’ve actually got to the comfort point. We’ve actually lent on fractional interests on properties and then worried about clearing them later.
But the main thing is we found ways that we are able to help people, and we’ve made a business model out of making loans to the people in charge of probate estates, executors, administrators, special administrators, as well as the trusts and conservatorship and guardianships even receiverships or as I like to kid around and say sometimes even sinking ships.
So if you’re finding a way to look at real estate title as being a major problem, considering breaking it down and it’s still a race to record state, understand the vesting, understand the usefulness of how other problems can actually be used to solve yet further deeper problems, and cleaning up title without involving the long-standing court issues and trying to get orders back. That’s my thought for today.
This episode is brought to you by closeprobate.com, loans and solutions for cash poor California estates and trusts. You are listening to the Gordian Knot with Rick Harmon.