What Would You Do (Seller Financing Recourse Stipulation)

Question

Not here to evaluate the deal, but to evaluate a stipulation that the seller has.

The numbers of the deal works out to $100 per door on a duplex using seller financing on a free and clear property.

However, during the negotiations the seller comes up with this statement.

"You also need to understand your risk in the event of default on the loan.  I understand that isn’t your intention, but in the event of default, I can “foreclose”, and any payments you’ve made will be considered as rent leaving you without an equity position.  Also, since the mortgage payment will be significantly less that the rental income from both units, I could sue for the difference.  Of course, I hope we would never end up in this situation, but I’m more comfortable knowing you understand these components."

We are in a stable market, but anything can happen during the course of the loan (as all of you know).

I came back and told the seller that I am fine with a full recourse loan, but none of this whole "considered as rent" statement.

She responded with

"However, if the buyer defaults, fails to make a payment for example, many agreements allow the seller to deem the payments “rent” and the agreement a lease. As such, the seller will often then proceed to evict the buyer under the theory that the buyer, now a tenant, has failed to pay rent. This is perfectly legal. In other words, when a buyer defaults - fails to pay a due installment or otherwise breaches another condition of the sales agreement - the seller will now exercise his right to deem the agreement a lease and proceed against the buyer under standard landlord and tenant law. He will evict the buyer and keep all the moneys previously paid. He may even be able to sue for moneys not yet paid.

This paragraph comes right off the Southwestern PA Legal Services website..."

And my final position (where we leave off the story right now) is that I am fine with a full recourse loan, but not the whole "treated as rent" stuff...

So.... What would you do and why?

Charles Patterson · Answer

Update on this.  Seller talked to her attorney and came back with all kinds of stipulations and demands that I was not comfortable with, and we decided to part ways on this deal.

One of the biggest is that I requested to see the current leases for the property and the past few years Schedule E (as this was an investment property of hers) in order to verify the performance of the property, and she went off that I had "No legal ground to request those documents", but she would provide the current leases AFTER we close.

That sent up more than one red flag in my opinion.  I feel like she is trying to hide something from me on this property.

Wayne Brooks · Answer

Yep, that's referring to installment sales and combo lease with agreement to purchase deals, with title passing After the buyer completely pays.  You do Not want that at all.

Charles Patterson · Answer

Standard disclosure comment of talk to an attorney and I am not one... blah blah blah.  That aside.Check your states Landlord/Tenant act.  I believe, key work is believe, that in PA we inherit contracts when we purchase the property.  In this case the new owner would inherit the contract if they had to foreclose.  In that case no recourse on you because the new owner has the contract technically.As for the foreclosure, that timeline and ability to foreclose will depend on what type of contract you have agreed upon.  Far too much information to go on here, but a land contract can be taken back quicker than a straight up owner financed deal where you have already gone through closing and the previous owner is carrying the note.

If you wanted to keep yourself a safety net you could put some verbiage in your contract that states if the property changes hands (is sold) that the current contract becomes a month-to-month or that it is null in void completely  and they have to seek a new contract with the new owners.  But you will want to put some feel good safety nets in that paragraph for the tenants.  Probably something along the lines that if you intend to sell the property that you will give them X months notice and option to break lease early without early termination penalty should that happen.  But all of this verbiage is going to be depending on your local Landlord/Tenant laws (again).

So in this circumstance I would encourage you setting up a meeting with a local RE attorney to discuss the situation and how you will want to protect yourself in the lease.

Stanley J Okazaki · Answer

Thanks for posting this @Charles Patterson, a lot to learn here.

Maybe you can help me with a potential situation that I'm having trouble working out due to my lack of experience.

Say I find a deal, the seller and I come to agreeable terms.

The property is a single family home, currently unoccupied. Upon closing , my plan is to get a tenant into the property & use the rents to pay off the seller every month.  Worse case scenario, for some reason I fall behind on the payments to the seller and they take recourse (foreclose). The tenant is still in the property.

My concern is that if the seller chooses to kick the tenant out after foreclosing on me , would the tenant have any recourse against me? Or would/ should I protect myself from that liability with some sort of disclosure in the lease agreement?

Charles Patterson · Answer

Thank you @Wayne Brooks.  She said that she is going to her attorney tomorrow to clarify.  Hopefully he understands her confusion and clears things up.I do agree about it being an installment sale or combo lease with agreement to purchase.  I have one of those contracts wrote up for one of my properties right now.  She just is not believing a word I say.

We will see what tomorrow holds.

Charles Patterson · Answer

I found the link that she was quoting from.  If anyone was wondering...http://www.splas.org/housing-artic-agree.html

What Would You Do (Seller Financing Recourse Stipulation)

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