In explanation, Mike’s practice was not to own real property in his name, but always through some legal entity… maybe “L&C LLC.” Through a different legal entity — also owned by Mike — with a name such as: “Equity Plus Mortgage,” Mike would hold a mortgage lien on that property. A mortgage lien secures the property as collateral for the lender.
Like most mortgage liens, the Equity Plus lien on our house (Mike’s house at the time) was registered in the town land records as the Primary Lien. In first place, the Primary Lien takes precedence over Secondary Liens, which may come later… say a contractor’s lien for an unpaid bill. In the event of foreclosure, default, short-sale or just an ordinary sale; Equity Plus would get paid off first, and if nothing remained, the contractors would be out of luck.
Mike and I discussed price and soon came to a meeting of minds. I drafted a Purchase & Sale (P&S). We affixed our signatures to the document. We were now under contract! Except legally, our contract was worthless: Mike did not own the house, his company, L&C LLC owned it. Mike owned the LLC.
Before conveying the house to my family, Mike foreclosed on himself in order to wipe out secondary liens. That is why this had to be a handshake deal: The LLC owned the house when Mike and I came to agreement, but by closing date, Mike’s other company, Equity Plus, having foreclosed on L&C would now be our seller. Mike was not the owner of record; a contract with L&C would be meaningless since, by the closing date, L&C would have lost the house to foreclosure to Equity Plus; but we could not enter into a contract with Equity Plus because — even though they would soon become the owner — at the time of Mike and my meeting of minds, Equity Plus was not yet the owner. If your eyes are glazing over, that’s to be expected 🙂
As closing approached, Mike seemed very confident that it would go through, even though our contract was not binding. So I asked him: “Mike, how do you know I will show up at the closing with the money?”
“You told me you will,” Steve, “so I know you will.”