Real Property as Debt Payment: Is it Legal?
The pandemic has brought barter back from the grave. A cashless transaction of goods flourished once again, trading plants for groceries for starters and going as far as swapping cars for land!
Before you get carried away with such a convenient and hassle-free deal, take time consider its pros and cons – especially with real estate exchange.
How do we transact when real estate is offered as a form of debt payment? Indeed where do we even begin with. From fundamental trade principles, to legal aspects. we are going to go through the scenarios you might get into and how to come up on top of a deal.
Let’s start with the basic considerations:
- How do we make sure that the trade of payment and property is legitimate?
- What are the signs you have to be aware of when settling for a payment?
- How do we assess or appraise the value of the property in exchange for the debt?
- What are the certain legal regulations in this form of trade?
Take this as an example: let’s say we owe a person 5 million and we transact to pay the debt by offering our fully furnished 1 bedroom condo unit. We then propose that the current market value is 5 million but we actually bought the unit for only 2.7 million, now, is this proposal justifiable?
On the other hand, if you are the one who is about to get the condo unit, have you just been ripped off because the person only bought it for 2.7 million? If, so what action will you do prevent this unfair deal or at the very least confirm the real market value suggested?
So, how do we proceed from here onwards with this deal? Let’s start with the first issue:
Payment and Property Legitimacy
As any side of the party, whether you are a debtor or a debtee, you must ensure that you keep a record of how much you owe, who owes you how much and the conditions you have both agreed upon that binds you to a mutual agreement. Next up is…
Validate Before Settling
We go back to the basics – do your research. We Filipinos tend to be very trusting, but these kinds of transactions need validation or you will end up losing money. Take a client of mine as an example.
My client was offered a lot in Westwoods as debt payment. Because he knows and trusts the person, he was set to agree. The debtor’s lawyer sent the land documents, and while reviewing, we wondered why there’s no such lot number in our records of lots in Westwoods! The address indicated was also in Hibao-an, not in Dungon where Westwoods Subdivision is located.
Eventually, we found out that the lot was indeed not in Westwoods, but in Monte Rosa Subdivision in Hibaoan. Hadn’t we checked the documents thoroughly, our client would have been defrauded and lost a lot of money considering the lot value of these subdivisions are different.
No matter how enticing the deal might be especially on paper, you must take a step further to actually see the property for yourself. Couple this with consulting professionals, real-estate brokers or agents, anyone with the credentials and credibility to give you a well-informed decision before striking a deal. From here, it would just be perfectly reasonable to…
Assess and Appraise
Investigate before you invest, especially the price you are about to pay or ask for. One of the most essential principles in setting the price is to have professionals look into the property and appraise its value. By doing this you are going to be sure that you do not get the short end of the stick and as well as ensure that the other party isn’t taken advantage of. After all, what’s the value of the deal when you don’t value trust? Finally, we must consider…
Legal Regulations
Of course we want it to be legal, otherwise it’s going to be a disaster – for both parties. Before finalizing a deal it is ideal to seek legal counsel, especially if there is a hefty price tag or debt to be dealt with. If the property belongs to a Condo Corporation, study its regulations and the laws upon which they operate. The same principle applies for real estate developers as well as titled land owners – they are all under the scope of the law.
Furthermore, this will ensure that the transactions are within the proper legal boundaries, and, as an added bonus, you will be surprised as to how laws can guide you to acquire other assets. Â Â
Well, it still boils to one thing before agreeing to accept real estate as form of payment…due diligence. Check papers, know restrictions, are there any outstanding balances from the developer just to name a few. There is no shortcut to this no matter how tempting. You can’t just accept a deal out of convenience because this will give a lot of inconvenience in the long run.
This pandemic is a time to be considerate and vigilant. It is not acceptable to set an assumed market value to a property and it is also equally unacceptable to just fixate on the properties initial cost of acquisition. It has to be win win situation for both parties.
I will discuss the mortgage of real estate property to come up with much needed cash to pay another debt in my next blog.