Q: I am thinking of providing owner financing to a potential buyer of one of my homes. This would be a second home for my buyer and he would use it as his vacation home. What would happen to that second home if he were to declare bankruptcy or if he loses his primary residence in a foreclosureForeclosure is the legal action taken to extinguish a home owner's right and interestInterest is money charged for the use of borrowed funds. Usually expressed as an interest rate, it is the percentage of the total loan charged annually for the use of the funds. in a property, so that the property can be sold in a foreclosure sale to satisfy a debt.?
A: We think you’re asking the wrong question. The real question you should ask is this: What will happen to the property you sell this person should he stop making his payments to you?
If you provide financing to this buyer, will he put down a substantial down payment? If he does, a large down payment should give you some comfort. If he puts down little or no money, you might be better off renting the home to him, and perhaps arrange to sell it to him in the future when his finances are more stable. Evicting a tenant from a lease is easier in most states than going through a foreclosure.
If you sell the home to him and he has financial difficulties with his primary residence, his financial difficulties most likely would spill over onto the vacation home. Homeowners are likely to stop paying the mortgageA Mortgage is a document granting a lien on a home in exchange for financing granted by a lender. The mortgage is the means by which the lender secures the loan and has the ability to foreclose on the home. on a second home before putting their primary residence in jeopardy.
In a bankruptcy, you might find that you still have to foreclose against this buyer if he stopped paying on the loanA Loan is an amount of money that is lent to a borrower, who agrees to repay it plus interest. you gave him for the purchase of the property.
If you suspect that your buyer is in financial stress, why would you want to sell him your home? If he merely loses his primary residence in a foreclosure, that fact alone should not affect his ownershipOwnership is the absolute right to use, enjoy, and dispose of property. You own it! of the vacation home. The key is whether he pays you the money he owes and whether you have enough of a cushion in the transaction to weather the storm should he stop making his payments to you.
Before you proceed with the sale of the home to this buyer, make sure you have obtained a copy of his credit report and understand his financial situation. Once you do, make sure you hire an attorney to advise you on structuring the sale to this buyer.
One option might be to sell it to him and take back a mortgage. But another option might be to sell him the home by using an installment contract for deedAn Installment Contract for Deed refers to purchasing property in installments. TitleTitle refers to the ownership of a particular piece of property. to the property is given to the purchaser when all installments are made. For more information take a look at our [Installment Contract for Deed](http://www.thinkglink.com/installment-contract) topic page and the articles we have written on this subject., otherwise known as a sale of the property over time where you retain legal title to the home.
Another issue you might face is whether you currently have a loan on this property and whether you intend to pay off this loan.
If you’re financing your buyer’s purchase of the property, but you still have an existing loan that you’re not planning to pay off, this could cause a huge problem for you down the line.
Aside from running afoul of your current lenderA Lender is a person, company, corporation, or entity that lends money for the purchase of real estate.’s requirements, you’ll have lost control over the asset. If the buyer fails to make any payments that are due, you’ll have to continue to make the payments to your lender. If you don’t, you’ll harm your credit and your lender could foreclose on the home you sold to this person.
For more details about how to protect yourself, please talk to a local real estateReal Estate is land and anything permanently attached to it, such as buildings and improvements. attorneyA Real Estate Attorney is an attorney who specializes in the purchase and sale of real estate..
April 9, 2009