Buyer stopped at month five, and it took 11 months to get the cottage back

Writing this out because everyone told me owner financing was the easy way to sell and I believed them.

Background for anyone new like I was. Seller financing means I sold the house and instead of the buyer getting a bank loan, he signed a promissory note (a written promise to pay me on a schedule) and a deed of trust (the document that lets me take the house back if he doesn't). He got the deed, I got a recorded lien and a payment every month.

The numbers. Small 2 bed cottage I'd lived in and then rented, sold at 132k. Buyer put 5% down, 6,600. Note of 125,400 at 7%, 30 years, payment 834 a month. I used forms I found online and had a paralegal look at them for 300 dollars. No escrow, no servicer, he paid me by Zelle.

He paid five times. Month six was late, month seven he told me his hours got cut, month eight was nothing.

What it actually cost:

Attorney to foreclose, 13,800. My state is judicial and it took 11 months from the first demand letter.
Unpaid property taxes I didn't know about, 2,900. The county notice went to him.
Insurance had lapsed in month four. I found out when I got the house back. Four months uninsured with someone else living in it.
Force-placed insurance and reinstating the tax account, about 1,200.
Missed payments, about 15,000 of gross, though I know that isn't a real out of pocket.
Turn cost when I got it back, 9,400 so far and the sewer scope isn't done.

His 6,600 down covered about six weeks of the attorney.

What I'd do differently, plainly: 20% down or no deal, taxes and insurance escrowed through a paid servicer so I see a lapse in the same week it happens, documents drafted by a real estate attorney in my state instead of a form I edited, and I'd ask that attorney how long a foreclosure takes here before agreeing to carry anything at all. I never priced the 11 months.

Answer

3mikeoconnell7SP2APRO6

@ember, because he owned it. Once title transfers, the buyer is the owner and your deed of trust is a lien, so getting the property back means going through your state's foreclosure process with the buyer's due process rights intact. Some states allow a nonjudicial process that runs in a few months, others require a court case, and halyard was in a court state. That's a question for a local attorney before you sign, and it's the number that sets the price of default.

@halyard, the 13,800 hurts but the escrow gap is the part that turned a bad month into a bad year. Taxes and insurance are the two obligations that damage your collateral without you hearing about it. In an escrow arrangement the buyer pays you or a servicer an extra amount every month, the servicer holds it, and the servicer pays the tax bill and the insurance premium directly. Two things happen: you know within days when a payment is short, and the policy can't lapse because nobody's paying it.

The other cheap fix is naming yourself as mortgagee on the policy with a notice of cancellation requirement. Insurers will send you the cancellation notice. That alone would have told you in month four that something was wrong, back when he was still current on the note and would have talked to you.

5% down was the underlying decision. Escrow and notice would have shortened your reaction time from eight months to about three weeks.

11 replies

2aliyah_bAU2APRO6

5% down means he had 6,600 in the deal and walking away cost him his credit and nothing else. At 20% he'd have had 26,400 on the line and he'd have borrowed from family before he let it go. That's the whole story in one number.

0derekj19SB1B

The servicing part is interesting to me for other reasons. Are the companies that do this small enough that a local one could exist, or is it all national outfits with software?

1bmoreno23AB1B

Genuinely asking because I'm at zero. If you had the deed of trust and he wasn't paying, why couldn't you just take the house back? Where does 11 months come from?

-1dpatel_reCS4A

I'd have underwritten him the way a lender would. 834 a month plus taxes and insurance is realistically 1,050 to 1,150 all in. What was his gross income, and what did he have left in the bank after the 6,600. If the answer to the second one is under three payments you've already got the outcome. Hours getting cut is not an unusual event, it's the base rate.

0nataliehsuSO1BPRO7

Rough read. Would a contract for deed have been faster to unwind, or is that one of those things where it depends on where you are?

1monica_tran3SF4CPRO6

@plumb it depends on the state, and in several states the courts treat a contract for deed close enough to a mortgage that you end up foreclosing anyway. @halyard, my near miss ran the other direction. Buyer on a small mixed use building went quiet in month nine and my attorney's first call was about a deed in lieu rather than foreclosure. Six weeks, 3,100 in legal, keys in hand. It only worked because the guy had nothing to gain by staying and I offered to release him from the deficiency. Worth asking early whether the buyer wants out, before positions harden.

1wendy_park48CapitalPRO7

I'd like to know what was missing from the forms. In the seller-carried notes I've read, the clauses that do the work when things break are the ones requiring annual proof of paid taxes, requiring evidence of insurance with the holder named and a cancellation notice, acceleration on any further encumbrance of the property, and a late fee with enough teeth that month six gets a phone call instead of a shrug. A 300 dollar paralegal review isn't reviewing for any of that. It's checking that the blanks are filled in.

1raj_mehta14CapitalPRO6

Dumb question from someone still figuring out paper. Once he was two payments down, could you have sold the note to somebody instead of foreclosing, or is a note that's already delinquent basically unsellable?

3omar_haddadActivePRO11

9,400 with the sewer scope outstanding is going to be 15k. It always is. Budget the flooring you haven't looked under yet.

1megan_doyle15 Get yours

So the down payment isn't really about the money, it's about what the buyer loses by leaving?