Can real estate be sold if the owner used it as collateral?

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Can real estate be sold if the owner used it as collateral?

We put some money for a down payment on some land and once we were done paying all the down

payment, the real estate guy and the owner came and told us that the owner had a loan he had gotten out to pay for the back taxes on the land but that he would be making the monthly payments on his loan till all paid out. The reason they came and told us was because the lawyer doing the closing wanted us to be informed of

that loan since the property is up for collateral on that loan. The owner said that we would still be able to get the deed with vendors lien on on it because we need that in order to get water connected.

Asked on May 27, 2019 under Real Estate Law, Texas

Answers:

SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 2 years ago | Contributor

No, it cannot be sold if used as collateral. Selling the land means potentially impairing the lender's recourse, or ability to get paid if there is a default on the loan, since now they'd have to try to recover the land (foreclose) against a different person who'd likely fight the foreclosure: even though the lender would (if the security interest was properly perfected and filed) most likely win, this would impose costs and delays on them. The seller cannot impact the lender's security interest that way. Loans and liens are supposed to be paid off at closings, with the proceeds of the sale: the seller does not get to pocket the money while potentially leaving the buyers and lenders holding the bag. There is no reason why he would not pay off the loan at closing unless he is intending to simply take the money and walk away.
The seller committed fraud: he lied about being able to sell the home unencumbered and provide you clean title. You would have grounds to void the sale based on fraud, get your money back, and walk away. You might also get other compensation for any provable costs his fraud has cost you (e.g. fees or expenses you have incurred in this transaction). You could tell the seller and his attorney that the seller has to pay off this loan at closing (and provide proof that he has arranged to do this) or else you will not close and seek your deposit back and other compensation on the basis of his fraud in not disclosing the loan.


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