Legal Question in Real Estate Law in California
Sorry that this is in more detail then might be needed.
While I have a "gut" feeling that it can not be done and I do not know of it being done, why can the following not occur? B purchases S' house, getting a bank loan, but S must carry back as a second the remaining portion of the purchase price. That second requires monthly payment of principal and interest. A few months after the sale, B declares she can pay monthly only part of the sum due under the "second." For technical reasons the carry back loan might not qualify as a secured second but may only be an unsecured loan.
Normally, S would have to file suit [and a lis pendes] to get a judgment against B, place a judgment lien on the property, and then try to sell the property, subject to the bank's first. The bank would foreclose because its security is being threatened; that foreclosure process would take at least 3-4 months. If the S buys the property at the foreclosure sale, her economic situation is: money received = downpayment, payments made on second, sum equal to first;escrow fees, transfer taxes; money paid out = escrow fees, higher taxed because property re-assessed to sale's price, house value, costs of suit. Filing suit against B is time consuming.
Instead, can S declare that B has breached the contract and ask that the parties be returned to their pre-contract positions, but with S assuming the first from the innocent lender? So S gets the property back subject to the first mortgage [she has already received from escrow the full amount of the first mortgage so it is like she borrowed that sum from the lender] and returns to B the amounts received as payments on the second. So S is back to the pre-sale position except for now having a mortgage in the same amount as the cash she actually received, and has incurred some minor costs that might be awarded against B so that S does not return the full amount she got from B. B does not have the house but has no loan to pay and gets back most of the money she has already paid. Since B is threatening to file for bankruptcy, S is getting stuck with a worthless second and no house.
1 Answer from Attorneys
You need to consult with an attorney. This is not something that is capable of being answered on a free forum. It is complex, and a lot more needs to be reviewed to provide an opinion upon which you can determine how best to proceed. You also need to get a better understanding of what you can and cannot do as a second mortgage holder in California.
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