A Promissory observe Trap-Lending Without Understanding Is Costly

A Promissory observe Trap-Lending Without Understanding Is Costly

The Story

Names and locations have been changed to protect privacy. The widow, Paula Raymond, was 84 years old and feeling the effects of aging. She had been living alone after the death of her husband in 2009. She lived in the same 60-year-old house they bought 55 years ago, in 1954. The house had not been updated since its buy, was in need of repairs, and was now too large for her. She decided to gift it to her only grandson, Jack, who was 22 years old. Paula, being frugal, purchased a Quit Claim Deed form at the stationary store, filled in the blanks and presented it to Jack. He took it to the courthouse and had it recorded.

Shortly after that, in 2009, Paula moved into an assisted living facility. Jack decided to modernize the house and then sell it. He obtained construction bids from three reputable contractors and accepted a $75,000 bid. Jacks father, Robert, agreed to lend Jack $75,000 that was evidenced by a promissory observe secured by a mortgage on the character. Robert agreed to become a financial partner in the project. Their plan was to do a first-class modernization job and sell for a profit. This was in the spring of 2010.

Jack went on the internet and downloaded a blank promissory observe form and a mortgage form, filled them out, executed them, gave Robert the executed observe, and recorded the mortgage. Four months later the modernization job was completed, and the character was listed for sale with a local Realtor for $450,000. After being on the market for 60 days, it went under contract at the complete listed price. The Realtor arranged for the closing with a local title insurance company. A Title Insurance Commitment was order.

Title Problems are Discovered

When Paula and her husband purchased the character in 1954, they closed the transaction with the seller themselves; there were no title insurance companies in the community. No updated title information had been obtained on the character for 56 years. The Title Commitment ordered in 2010, showed numerous title problems. Jack, Robert, and the Realtor were confronted with the following issues stated in the 2010 Title Commitment:

The deed conveying title to Paula and her husband was not notarized. When Paula and her husband purchased, there was an unreleased mortgage of record that was owed by the sellers. When Paula and her husband purchased, there was an unreleased judgment lien of record owed by the sellers. A fresh survey showed the winding driveway from the main road to the house encroached on a nearby parcel of land. A fresh survey showed the storage discarded at the rear of the character, and the similarities rear fence, encroached on an other nearby parcel of land.

Title Problems are Dealt With

The buyers attorney reviewed the Title Commitment; he advised his clients to exercise an escape clause in the buy contract and to terminate the contract. Now Jack and Robert owned a newly remodeled, $450,000, vacant house; it had a $75,000 promissory observe and mortgage on; it couldnt be sold until five complicate title issues were resolved. In addition to the title problems, the general real estate market, and the local character values, were all declining.

To resolve the five title problems required engaging a local attorney who had to negotiate with several other attorneys representing the other adjoining character owners to resolve the invasion issues. He also had to do a Quiet Title Action to clear the defects caused by the unreleased liens.

It took eighteen months and $24,000 in legal fees and costs to resolve the five title issues. In early 2013, the character was re-listed for sale. Its market value had declined 15% during the time it was off the market: from $450,000 to $382,500–a $67,500 decline. During the eighteen months the character was vacant, the taxes, insurance, lawn care, and heat and light costs amounted to $2,600. When the character finally went under contract the buyer couldnt qualify for a bank loan. Jack and Robert decided to provide the buyer with seller financing. They carried the loan for five years at 5.0% interest.

The total cost of the mishandled title issues was a sales proceeds decline of $94,100 and not receiving cash from the sale for five years.


Honest, well intended, individuals applying commonsense procedures to technical legal matters can inadvertently destroy values. Not knowing what one does not know results in a costly learning experience.

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