Deed in Escrow

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Latest post 02-17-2011 8:35 AM by Drew. 18 replies.
  • 02-16-2011 12:35 PM

    • dd62
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    Deed in Escrow

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    If a mortgagee executes a deed in escrow at the time of the mortgage (i.e. if you don’t pay, deed is signed to the mortgagee) then it is my understanding that the deed is invalid. However, what if the mortgagor currently does not know that the deed is invalid? He subsequently assumes the mortgagor has the interest right in the property. The mortgagee then sells the property to another buyer. Mortgagor later finds that he may own the property and files suit to get his property back. What occurs? 

    Not sure if that is enough details but I just want to know what happens if someone with a bad deed, which may seem good at the time, sells a property. Does the original owner get the property back and force the mortgagee to foreclose on the property or does the third party buyer have rights to the property?

  • 02-16-2011 2:24 PM In reply to

    • Drew
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    Re: Deed in Escrow

    I'm not sure if you have your "ors' and "ees" and statements about valid deeds correct--and the details may vary a lot  as to the state recording statute  as to recording priority and notice.

    If I own Blackacre and execute a deed to you to be held in escrow pending  completion of some performance I need to make that's fine--but in the meantime if I create a new deed and sell property to Sam down the road  (and he knows nothing of the deal with you ) and Sam runs over to courthouse  and records his deed right away --and you snooze --Sam may be first in a one horse race when you wake up!. 

    Now if there is a properly recorded mortgage on Blackacre--Sam will still need to address the balance due on the mortgage etc.

    And you may have other issues to address:

    Often an innocent buyer who properly perfects his title holds good title.

    Generally  a   title holder cannot convey more titles than he holds.

     

     



  • 02-16-2011 2:49 PM In reply to

    Re: Deed in Escrow

    Generally, deeds are not executed unless the purchase is funded.

    So I really don't understand who's done what to who in your scenario.

    Maybe you could flesh it out without getting bogged down in legal terminology.

     

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  • 02-16-2011 3:08 PM In reply to

    • dd62
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    Re: Deed in Escrow

    Ok, let me try to explain this a little clearer.

    John owns land worth $1 million. John suddenly needs money for medical bills. Jane offers to give John $100,000. In exchange John agrees to pay Jane $150,000 after a year. They also put a deed in escrow. If John fails to pay the $150,000 at the end of the year then escrow records the deed to Jane. John remains in possession of the property.

    My understanding is that this is technically a mortgage and even if John fails to payback the loan at the end of the year Jane does not own the property. Jane must initiate foreclosure proceedings to get back the money she loaned John. The deed that is signed to Jane is invalid clogging of John's right to redemption since it was executed at the same time as the mortgage.

    My question is that if John is not aware that he has rights to the property until foreclosure and just assumes Jane owns the property and Jane then subsequently sells the property to someone, what happens? If John later comes back to assert his right to the property does he get it back and force Jane to foreclose? What happens to the third party that bought the property?

  • 02-16-2011 3:39 PM In reply to

    • Drew
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    Re: Deed in Escrow

    You are going to need a state by state detail review--but my  lay view is that if  John executes a valid deed to Jane and the deed  is held in escrow --and the escrow agent delivers the deed to Jane then at that moment her title is superior to Johns claims -AND just as soon as  Jane records the title it is superior to just about everything .

    If Jane then sells it to Peter, and lets assume Peter is totally innocent of the John/Jane problems, Peter gets good title and he best record same and that puts world on notice of he is first in line. 

    I'm not sure if a right of redemption applies if  John gave a deed to Jane. 

    Had it been a true typical mortgage with but a pledge of ownership and a  recorded mortgage note  that might require additional steps to foreclose--but apparently Jane was pretty smart



  • 02-16-2011 3:56 PM In reply to

    • dd62
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    Re: Deed in Escrow

    Assume we are in a lien theory state where the mortgagee (in this case Jane) only has a lien to the property and the mortgagor (in this case John) has a right and ownership of the property. My reading tells me that courts do not enforce deeds in escrow at the time of mortgage, but they do allow it if it is subsequent to a mortgage. The deed executed would be invalid even if it is recorded by escrow. Peter may be innocent but it really doesn't matter since John actually has right to the property since Jane has not initiated foreclosure.

    Let's just say for this situation assume what John and Jane have is a mortgage. Jane technically has no way of obtaining the property except through foreclosure. John didn't know this. Jane sold the property. Now John wants the land back. My assumption is John actually gets it back and if he has the money to pay back Jane, will be free and clear of the mortgage. However, if John doesn't have the money Jane will have to foreclose. Peter, will have to go after Jane to get his money back. This is my conclusion but I'm not sure and just looking for someone to verify.

  • 02-16-2011 4:04 PM In reply to

    • Drew
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    Re: Deed in Escrow

    I'm in over my head--but in a lien state the borrower holds title and thats NOT what John did--he executed a deed to Jane.

    So you better find state specific  law that says Jane is wrong!



  • 02-16-2011 4:21 PM In reply to

    • dd62
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    Re: Deed in Escrow

    I don't believe I really have to be state specific since in this case the mortgage is ruled by the federal Truth in Lending Act. You can see Perry v. Queen, 2006 WL 481666. In that case, the couple executed a warranty deed to someone in exchange for enough money to bring their payments current. That guy gave them an option contract to buy back their property within a year if they paid back the money plus some additional money. The couple retained possession of the property which was leased back to them. The guy tried to argue it was a sale but the court ruled it a mortgage. Foreclosure was his only recourse.

  • 02-16-2011 4:27 PM In reply to

    • dd62
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    Re: Deed in Escrow

    John did hold title. The deed in escrow was not recorded to Jane at the time of the mortgage but would only be signed if John failed to pay. Hence the requirement is tied to the mortgage which makes that aspect of the mortgage (the giving of the deed if John fails to pay) invalid. Title actually never changes hand and remains in possession of John.

  • 02-16-2011 4:39 PM In reply to

    Re: Deed in Escrow

    dd62:

    John owns land worth $1 million. John suddenly needs money for medical bills. Jane offers to give John $100,000. In exchange John agrees to pay Jane $150,000 after a year. They also put a deed in escrow. If John fails to pay the $150,000 at the end of the year then escrow records the deed to Jane. John remains in possession of the property.

    No he doesn't.

    Once that deed is recorded, Jane owns the property. Period.

    If anybody is actually contemplating doing that, they need to rethink it, because there is a better way of doing it by Jane lending John the money and writing a mortgage on the property so she becomes a secured lender for that amount and then has the right of foreclosure if John doesn't pay.

    dd62:

    My understanding is that this is technically a mortgage and even if John fails to payback the loan at the end of the year Jane does not own the property. Jane must initiate foreclosure proceedings to get back the money she loaned John. The deed that is signed to Jane is invalid clogging of John's right to redemption since it was executed at the same time as the mortgage.

    Wrong.

    Again, once the signed deed is recorded, Jane owns the property and all she has to do is evict John.

    dd62:
    My question is that if John is not aware that he has rights to the property until foreclosure and just assumes Jane owns the property and Jane then subsequently sells the property to someone, what happens?

    John appears to very stupid.

    But there is nothing to assume. Jane owns the property upon the recording of the deed, whether stupid John knows it or not.

    dd62:
    If John later comes back to assert his right to the property does he get it back and force Jane to foreclose?

    Wrong again. Once Jane owns the property, stupid John has no rights to assert.

    dd62:
    What happens to the third party that bought the property?

    Nothing. Once Jane sells the property to somebody else, that somebody else owns it and stupid John has long since kissed the property goodbye.

     

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  • 02-16-2011 4:48 PM In reply to

    • dd62
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    Re: Deed in Escrow

    Gee, you seem super confident in your answers. I guess all the caselaw I've been reading is just flat out wrong. You should really write to the authors of my book and tell them how wrong they are. Here's an excerpt:

    "The deed in escrow as a clog. Sometimes, in conjunction with the execution of a traditional mortgage, the mortgagor will deliver to the mortgagee or an escrow agent a deed to the mortgaged real estate. The understanding is that if the debt is satisfied, the deed will be returned to the mortgagor; however, in the event of default, the mortgagee or escrow agent is authorized to record the deed a substitute for foreclosing the mortgage. The deed represents an invalid clog on the equity of redemption."

    Or you can check out that Perry v Queen case where they signed over a warranty deed to the guy and got a contract with the option to buy back the property and the court still held that the mortgagee must intiate foreclosure despite the fact that he is holding a signed warranty deed. I guess the court was wrong there too...

  • 02-16-2011 4:53 PM In reply to

    • dd62
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    Re: Deed in Escrow

    As to your first statement, given the situation the court would consider what Jane has as a mortgage secured by John's property.

  • 02-16-2011 5:25 PM In reply to

    Re: Deed in Escrow

    dd62:

    Gee, you seem super confident in your answers. I guess all the caselaw I've been reading is just flat out wrong. You should really write to the authors of my book and tell them how wrong they are. Here's an excerpt:

    "The deed in escrow as a clog. Sometimes, in conjunction with the execution of a traditional mortgage, the mortgagor will deliver to the mortgagee or an escrow agent a deed to the mortgaged real estate. The understanding is that if the debt is satisfied, the deed will be returned to the mortgagor; however, in the event of default, the mortgagee or escrow agent is authorized to record the deed a substitute for foreclosing the mortgage. The deed represents an invalid clog on the equity of redemption."

    And what book was that, pray tell?

    I once read a book that said I could make a million dollars in real estate with no money down. Guess what, I didn't.

    But I did spend the last 30 years buying and selling investment properties.

    dd62:

    Or you can check out that Perry v Queen case where they signed over a warranty deed to the guy and got a contract with the option to buy back the property and the court still held that the mortgagee must intiate foreclosure despite the fact that he is holding a signed warranty deed. I guess the court was wrong there too...

    I'd be happy to check out that case decision if you could provide a link to the entire decision and not just some summary or anecdote of what it purports to be.

    What I have found so far is that the case decision:

    1 - Involves other factors than just the holding of a signed warranty deed.

    2 - Is unpublished so it does not set any kind of precendent that binds any court to follow.

    3 - That the decision came from Tennessee which does not bind the courts of any other state. You are writing from HI. The Perry v Queen decision could be totally irrelevant there.

    • "Perry v. Queen, (M.D. Tn. Civil No. 3:05-0599) 2006 U.S. Dist. LEXIS 17120, February 27, 2006 (unpublished), available on the website of the Federal Court for the Middle District of Tennessee (PACER registration, login, and password required)."

    http://homeequitytheft.blogspot.com/2007/01/tennessee-federal-court-declares-sale.html

    I would be happy to analyze the decision for you if you would go on to PACER, access the decision, and paste here in full.

     

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  • 02-16-2011 5:49 PM In reply to

    • dd62
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    Re: Deed in Escrow

    Look, I came on this site looking for assistance with a question and I'm obviously not getting it. I'm not here to defend my position. I'm a law student and I'm telling you exactly what my textbook is saying. The book is Real Estate Transfer, Finance and Development (casebook). Feel free to discredit it. But I'm in school and I think I'll take the word of my published textbook over some random cocky guy on the internet pushing around his 30 years of real estate experience.

    The case was one example. You're right that it's not binding on my state but it could be persuasive. It's the case that is presented in my text. There are others but it was the most clear cut and relatable to my hypothetical. I'm not sure what PACER is, I use LexisNexis and Westlaw. Yes there are other factors in the case but those factors support my argument. I don't go over them because I didn't want to explain an entire case on this forum.

    It's hard to find a case that matches my hypothetical because the hypothetical requires all parties to be absolute morons. Nonetheless, it's what I have to work with. Since everyone is stuck on the fact that the deed should be good rather than agree to the assumption that it is bad, I give up.

    I'm not going go any further about this on this forum since I'm not getting any answers just debate over my stance from what I learned. Thanks to those who actually attempted to help me.

  • 02-16-2011 6:23 PM In reply to

    Re: Deed in Escrow

    Ah, now the truth comes out.

    You want us to do your homework for you.

    We don't do that here.

     

    • The right of the people 
    • to keep and bear arms,
    • shall not be infringed.
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