I've had other conversations with the potential buyer and they seemed to clarify that their proposition is a "subject to" and are proposing a "wrap around mortgage" to help secure up the payment default risk which seems to take some risk off the table from a Seller standpoint. 

These loans have pretty favorable terms since the stocks in your account are the collateral if you default so reach out to your brokerage.

Get an attorney, default the contractor, sell the house and move on.You will most likely take a significant loss, but in many instances people will not want to let go and it ends up costing them more In the long runSorry you have to go through with this as it sucks when dealing with people like this which is why I always tell people never ever partner with your GC.

If you use one and end up in court, you may lose by default. 

I have done a lot of seller 0 % financing personally ( selling my OREO in bad times) was a great way not to take a complete bath.. and frankly when buyers are paying zero interest I personally never had one default.. they know in a short amount of time they will own it free and clear.

If it goes into default and you want to reinstate its $100 + unpaid fees.

Veterans who dispose or transfer their properties under these conditions remain liable to VA for any loss that may occur as a result of future default and subsequent payment, unless the property is transferred to a creditworthy purchaser who agrees to assume the payment obligation the servicer initially determines the purchaser's creditworthinessAny purchaser may qualify to assume a VA loan however, for a veteran’s entitlement to be restored, a veteran purchaser with sufficient entitlement must complete a substitution of entitlement when the ROL is closed.

However, the borrower must be aware of refinancing risks as there's a risk the loan may reset at a higher interest rate.Pros and Cons of Balloon LoansFor some buyers, a balloon loan has clear advantages.much lower monthly payments than a traditional amortized loan because very little of the principal is being repaid; this may permit an individual to borrow more than they otherwise couldif interest rates are high, not feeling the full impact of them because, as noted above, the payment is reduced, given the limited pay down of principalif interest rates are high, not committing to decades of paying at that rate; the term is probably five to seven years, after which the borrower gets to refinance, possibly at a lower interest rate.But having a loan with a giant balloon payment of most or all of the principal also has clear disadvantages.defaulting on the loan if the borrower cannot convince their current lender or another entity to finance the balloon payment – and cannot raise the funds to pay off the principal balanceif property values have fallen, being unable to sell the property at a high enough price to pay the balloon payment, and then defaulting on the loanbeing able to successfully refinance the balloon loan, but at a higher interest rate, driving up monthly payments (this will be even more true, if the new loan is amortized and includes paying off the principal)There's also an underlying risk of opting for a balloon loan: It's easy to be fooled by the smallness of the original interest-only (or mostly) monthly payment into borrowing more money than an individual can comfortably afford to borrow.

Plus if the borrower defaults you get the property hopefully at a pretty nice discount.

How do you protect yourself in the event the seller defaults on their mortgage?