Is It Ethical To Structure Seller Financing on Wrap Transactions With the Intent to Default?

[Bryan Hancock]

This subject has been poked around in several posts on BP and I am interested to know what others' opinions about it are. For the purpose of this thread "seller financing" is defined as follows:

1. The seller has a loan that they have personally guaranteed with some lender

2. The seller has some form of financial distress

3. The buyer offers to purchase a deal by either buying the property subject-to without the bank's approval OR wraps a loan around the original loan to obtain financing for the purchase of the property

4. Assuming the buyer defaults the seller will get the property back. When the property is given back the original seller may or may not be able to make the mortgage payments or be in a position to service debt. Note that the property could now be in distress because deflation occurred and the property is now underwater

If this scenario plays out do you feel that it is ethical to simply give the property back to the original seller if you agreed to make payments on the loan? If necessary, your answer can be specified subject to the property being underwater or not underwater because of deflation.

It seems that many feel giving the property back to the original seller is okay because they "agreed" to this arrangement when they were in distress. Others seem to think that it is not okay because the buyer agreed to make payments going forward and they are giving the property back at an inopportune time.

Opinions? Legalities aside...is this ethical?