How to sell but protect myself from buyer's potential default?

Question

I have a house I'm  willing to sell for only $5,000 down (Selling price is $135k), with balance due in 3 years

Other than offering  a lease with purchase option at the end of 3 years, is there any way to protect myself in case the buyer defaults and I have to foreclose?  $5k is not much of a cushion to pay for foreclosure expenses, not to mention lost interest and the aggravation.

Would appreciate any ideas!!  Thank you

Jack Shea · Answer

A lease with an option delivers a title right and requires foreclosure in most places.

A better way is: 1) put the property in a revocable trust. 2) sell the beneficial interest to the buyer. 3) the buyer gives you a conditional assignment of the beneficial interest as security for the loan. 4) if the buyer defaults, you have the ownership of the trust. This information was just presented in a Master Trust Class in San Francisco October 17.

Jeff Rabinowitz · Answer

I am not a lawyer and do not know Oregon law. It is always best to consult a local lawyer.

If the tenant decides not to purchase within 3 years they will probably leave on their own. If they don't you should be able to evict them like any other tenant as long as you have not conveyed any equitable interest. Make sure you keep the lease and option agreement separate. Don't credit any rent toward the purchase cost as that could convey equitable interest and bring Dodd-Frank and the SAFE Act into play.You should only need to foreclose if you are financing the purchase (not wise under Dodd-Frank) and the buyer defaults.

Randy Johnston · Answer

@Shawn M. There are laws regarding seller financing that would preclude you from inserting a condition that would revert title back to the lender without going through a foreclosure. Not to mention, the majority of buyers out there would probably nix any such language.

Check out this BP article about how Dodd-Frank affects seller financing.

Ed­̶, I don't think there's a way to accomplish what you want without going through a foreclosure, not if your goal is to sell the property and transfer the deed to the buyer.

Jeff V. · Answer

@Ed B.

Another Option is to do a Lease Purchase instead of Lease Option...  End result is the same though.

Basically they lease the property for the term...  and have a purchase agreement filled out ect with a closing date in the future...  It could even be contingent on them making timely lease payments during the term...

If they fail to pay the Rent, you evict and their purchase agreement is now null and void.

If they do not execute their purchase agreement they are in breach of contract and you keep the earnest money.

Another flavor of the same thing.

Also, on a land contract...  tried to explain it clearly, but found that Jon Holdman already did an awesome job in the below post...  so I just quoted and linked him :D

Quote from Jon Holdman on the topic:

" A contract for deed is the same way most people buy cars. You're the lender, but you keep the deed (title, for a car) in your possession. The house (car) belongs to the buyer/borrower." - Jon Holdman

Jeff

Ed B. · Answer

Thanks, Randy, I have considered a land contract,but was told by an attorney once that a buyer's default still requires the seller to foreclose on the buyer's interest to get the property back.  I notice the Nolo article you sent a link for refers to a land contract forfeiture action; whether that's simpler, quicker, and/or less expensive than a normal foreclosure I don't know, but I'm trying to avoid any court action at all in case of default. Maybe it's not possible, but it probably wouldn't hurt to at least inquire again with an attorney who knows about this stuff.

Randy Johnston · Answer

Hi Ed, You may want to consider a land sales contract. Although not used very often, it basically gives the buyer an equity share in the property, but title remains in your name and the deed is kept in escrow until the final payment, at which time it gets transferred to the buyer.

You can read a bit more about it at http://www.nolo.com/legal-encyclopedia/the-basics-land-contracts.html.

Jack Shea · Answer

You are correct. A Contract for Option was invented after I spent a year in court after trying to evict an option tenant. The judge said I had to foreclose.

I have sold dozens of houses on that contract. It is a contract for personal property not real estate. It is the best tool for a minimal down payment.

The beneficial interest in a land trust gets tax benefits.

Ed B. · Answer

Jack, thanks for the answer to my question. I actually bought one of your Trust books a year or so ago. As I recall, you advocated selling a contract to buy an option to purchase, if I understood it correctly.  If they defaulted, they couldn't claim equitable ownership and force the seller to foreclose, because they were only defaulting on their contract to buy the option  and not the option itself. The downside of that from buyer's perspective is I don't think they could deduct % and other customary expenses normally available to an  owner, but I guess they could if they had ownership of the trust.

Michael Boyer · Answer

Ed, when I owner financed my first property, I used a title company, their lawyer, which I was surprised was only 100 bucks, and an escrow account, and used all standard docs for deed of trust and promissory note...all properly recorded first deed of trust.... I did 5 percent and 15 years....Then, to answer your question, on protecting yourself, I then got about 2 to 3 letters a week offering to buy the note from all over the country for the first year or two.... Over fifty easily....still random one now and then....

I never called any...The check comes like clockwork, I like 5 percent in current environment, so I never called, but there are lots of people who buy the notes. What do they pay? I never checked, but the better you document the tenants credit, more standard the docs, probably more... You may even find local finance firms that buy notes...so owner finance and selling the note would be one angle for protection exit...but not sure on those terms...a more traditional owner finance might be better for selling the notes. I like the above comment about seeing a lawyer with expertise in secured real estate transactions. There are all sorts of cases on secured land transactions in every state and you may or may not be creating the situation you seek without some guidance...

How to sell but protect myself from buyer's potential default?

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