If It Walks Like A Duck and Quacks Like A Duck: It's A Mortgage

In the mind of a real estate investor there are a million and one ways to structure a deal and get it to closing. I really and truly believe that statement. However, there are times when a real estate investor can be too smart for his or her own good. I’m talking about “creative financing”. GASP!

When the term creative financing is thrown around it’s usually in the company of other terms like contracts for deeds, installment contracts, lease options, agreements for deeds, etc. Almost always, these terms are being considered because the person extending the credit doesn’t want to deal with the hassle and expense of foreclosure in the event of default.  Rightfully so, but there are times when you just have to bite the bullet, roll with the punches, take your punishment like a man… you know what I mean.

I’m going to make this really easy and really clear. You cannot avoid foreclosure in Florida. That’s it. I don’t care what fancy name you give it or what secret document you “hold in the drawer”. If it is an agreement to purchase a piece of real property by any means other than cash or gift – it’s most likely going to be reclassified as a mortgage and you need to foreclose. Hold all of your nasty emails about how your buddy has used X,Y and Z a hundred times with no problem. So have plenty of other people, but I am here to tell you that you will get burned.  This is not just my opinion or me being an uptight attorney always over analyzing liabilities. I’m like you; I want something simple, fast and clean that I can use to easily mitigate my damages in the event of default, but that just doesn’t exist in Florida (legally).   Florida Courts have made it abundantly clear.  Let me give you just a few examples:

1. “Whenever property belonging to one person is held by another as security for the indebtedness of the other the transaction is in effect a mortgage”. This came from the case Williams v. Roundtree.

2. In Cinque v. Buschlen the Court dealt with a lease type of arrangement and looked at things like the fact that the lease called for acceleration upon default (not getting rent payments), reversion and right of possession to lessor (effectively the Mortgagee) and determined it was really a mortgage. Sound familiar? Right, this rules out lease options. Other things to be considered in this scenario would be tax implications and amount of payments in relation to fair market value. 

3. “All instruments of writing conveying or selling property for the purpose or with the intention of securing the payment of money are deemed mortgages”.  This one is from Adkinson v. Nyberg. 

4. And lastly, an agreement for deed is deemed to be a mortgage and subject to the same rules of foreclosure as a mortgage – First Fed. Sav. & Loan v. Fox.

There it is folks. See, you don’t have to take my word for it. If you want to finance something use a mortgage and note. If they don’t pay you – foreclose… or use a really, really well drafted Deed In Lieu. 

Of course there are scenarios where other documents can come in to play in “creative financing” such as land trusts to give the lender a little more control over the collateral during the term of the loan, or lease backs after closing. I think we can all see how those are a little different. 

A simple mortgage and note is not that expensive, and it’s easy for everyone to understand. Go ahead and use them and deal with the default as it presents itself. You hopefully have a ton of equity in the collateral anyway.