Expert: Los Angeles Bankruptcy Lawyer Leon D. Bayer - 5/10/2007

Question
QUESTION: I am buying a rehab property for $30k from a couple that is getting divorced and both are planning to file bankruptcy. I have gotten an appraisal to show that the property is only valued at $30K (I had to shop arround for this). This is a cash deal with no mortgage. Will this appraisal protect me from a trustee trying to repossess the property? Is this considered a legitimate sale?
ANSWER: A transfer made by someone who is insolvent and who then winds up in bankruptcy is always subject to close scrutiny.

Your appraisal is "evidence" that you paid what it was worth. However, please understand that "evidence" is not the same as "proof." Other appraisals might be evidence that the property is really worth a lot more than what you paid, so who would be right? Then it would be up to the judge to decide.

Maybe your appraiser has a poor reputation or very little experience compared to another appraiser who feels the property was worth much more? If a court finds your appraiser to less reliable, you might lose. Your appraiser's opinion is only just that - an opinion, it is not a guarantee. If the bankruptcy trustee thinks you got yourself too sweet of a deal, and if the judge agrees with that analysis, then the transfer to you may be set aside and you might lose the property.

I don't know what you mean by "had to shop around for this," but your choice of words makes me worry for you. Are you saying that other appraisers felt it is really worth more and you had to dig hard to find an appraiser that would say what you wanted them to say? Are you saying that the property is really worth more than you are paying, and you were lucky to find one this cheap? I just don't know what you mean.

Before you take the chance of blowing a lot of money on a deal that goes bad, you really should invest a couple two or three hundred bucks for a consult with the best local bankruptcy lawyer you can find.

Incidentally, do you really know what you are buying? How do you know they really own it? Are there liens against the property that you would get stuck with? Are you getting a title insurance policy? A good lawyer will help guide you through all of that. Good luck!

---------- FOLLOW-UP ----------

QUESTION: If the transfer is set aside...am I re-imbursed, or is there some way that I don't have a complete loss. (what is the process)  In addition, I intend to rehab the property quickly and there will be no good way for the trustee to determine the original value at transfer time. Will this help me? If I flip this house within a few weeks does it come back to bite me if a trustee actually gets the property set aside?

Answer
You really need to get advice on this from a super knowledgeable, local BK attorney. Somebody with boots on the ground in your own court district needs to guide you on this. You will not get proper legal advice via long distance e-mail.

To answer your direct question, you should get reimbursed for the purchase price, but you might get screwed on the money you spend for improvements because the trustee might argue convincingly that the improvement cost did not raise the property value dollar for dollar of what you spent.

For example, you could spend another $30K or more on fixing it up, and maybe the court will decide that you only raised the value by $15K, especially where your evidence and record keeping is sloppy or non existant, (you said: "there will be no good way for the trustee to determine the original value at transfer time. Will this help me?) MY ANSWER: NO. IT WILL HURT YOU. Don't kid yourself...you will not outsmart an expert bankruptcy trustee. (You are about to become a little fish in someone else's pond if this winds up as a fraudulent transfer action in the seller's bankruptcy).

Are you starting to see the risks of what I am trying to warn you about? Get some good local attorney advice. If there is no good way to determine the value at the time you acquire the property, you are setting yourself for serious/horrible trouble. The court might decide that the property was worth more than you paid, and that your improvements did not make a meaningful increase in market value. Spend the money to get good legal help, now.

Folks in your position sometimes don't like to get legal advice, because they just don't want to hear anything negative about a deal they have already become emotionally invested in. (Big mistake). I think its just part of human nature to react that way. But ignoring the warning signs is like ignoring Noah when he tells you there's gonna be a flood.  

Fortunately for you, you have been warned that the seller is going to file bankruptcy. I can assure you the transfer will be examined closely as a possible fraudulent transfer. This gives you the opportunity to guard yourself accordingly. Good luck. I hope it all works out for you.