Seller Finance Fail, Foreclosure, Eviction, Try Again

[Shiloh Lundahl]

In the summer of 2015, I bought a property in Apache Junction, Arizona for 100k. It was on the market for a little while at 130k but then dropped to 115k so I offered 100k quick close. The house was a 3/2 and I knew that it could rent for over $1000 plus it had a mobile home in the back that I thought could work well as a guest house for a multigenerational family. When I purchased it I had to put in about 10k in suring up the floor and doing some fixes. I knew that the margin was tight and it may not have been a great purchase but I had already closed. 

I decided to sell it seller finance in order to make money on the spread of what I had to pay at 5.5% for my 70k loan and charging about 9% for their loan. I got a buyer who put down 20k and I financed a loan 110k loan for them at just over 9%. This covered all my expenses plus my debt on the other 40k that I used to buy and rehab the property. In the end I cash flowed about $250 for the house. 

I sold the house in November of 2016.  They paid the monthly mortgage payment for the first 6 months and then there was a month that they missed. Since this was my first seller finance deal, I didn’t know exactly what to do, but then the buyer paid a double payment the next month. These payments were going through a servicing company so it took me a while to find out that they missed the payment in the first place. Then the following month they missed a payment again but I thought that they would just pay a double payment like they had done the prior month. The second month came without payment again. Then I called the buyer and she said that she was sorry and that she didn’t know that the payment hadn’t come out of her account and that she was going to make 3 payments altogether the next month. No payments came. When I contacted the servicing company I found out that the double payment check bounced (I know, not a very “on top of things” service company or maybe just a learning curve for me).

So now it had been 5 months and no payments. I was forced to grow up or mature a little bit as an investor and learn about the foreclosure process. I started the process at the end of September 2017 and it took until the middle of January 2018 for the forclosure and eviction to finalize and then take them to court to get a forcible judgement against them to get them out of the house.

Here are some before and after pictures. I know in these forums you usually have the after pictures looking nicer than the before pictures, but in this post it is the opposite. 

Before pictures

After pictures

My only saving grace in this situation is that the market has gone up considerably. So our plan is to rehab it. The rehab came in at 35k but that includes adding on the storage area in the back as part of the kitchen and putting in a new kitchen and bathroom and making the moble home in the back livable again. 

After I get it rehabbed I will refinance at 75% of the ARV and will be able to get my rehab money back out and then I will do a lease option with it and sell it for 160k. Thank goodness the market has gone up. Otherwise I would be taking a big loss.

[Jeff V.]

@Shiloh Lundahl

Sounds like this was your first seller finance deal. What did your screening process look like when lining up your buyer? Did you do the standard Criminal Background Check, Credit Check, Eviction Report for all 50 states along with monthly salary 3x PITI?

Curious if proper screening could have avoided this one or if screening was done, but this happened to be that small percent chance where the stars lined up and disaster struck.

Having this happen, have you since implemented any new screening measures from red flags you saw after the fact that may prevent this from occurring again?  

Or a more generic question is do you have any lessons learned from this that may help going forward?

One lesson that I see is that a larger down payment is required for a seller finance deal if you are on the seller end due to the extra expense of foreclosure.  Lower down payment is a better candidate for Lease Options.

That being said...  Typically you want to do longer lease options if your the buyer and shorter 1 yr lease options if your the seller.  You mentioned doing a 4 yr lease Option...  Curious why a 4 yr on the exit?

I was thinking...  lets say you need 20% down for a seller finance deal but your buyer isn't there yet.  You could take 5% Option Consideration down and then have them renew annually with an additional 1-5% until they have the 20% required.  Then they execute their option to buy using the Option consideration as their down payment and you seller finance the remainder.

This gives you multiple years up front of rental income, proof of their ability to pay, easier to come up with down payment, increases your spread from the underlying loan and makes the deal more solid and profitable over the long run.

Just an idea, interested in hearing your thoughts on it.

Jeff V