When you sell property to a buyer and finance it yourself, do you really know what obligations you are able to enforce? You know that if you carry a note secured by real estate and your buyer fails to pay, you are able to take the property back through foreclosure.
But, what if the property loses its value in the future? What if the economy of the area collapses? What if the property is damaged or destroyed? Are you stuck with a big loss? Maybe not. Sellers who seller-finance real estate in most States and in most situations have the law on their side to take further steps. Every State allows you to foreclose on the property and take it back. In many cases, you will be able to re-sell the property for an amount equal to, or greater than, what your buyer owes you on the note.
However, that requires the property to keep its value. What if the value of the property falls? Now you have a deficiency between what was owing to you and what you actually received. Many States allow you to enforce the promise on the note. That means you can demand and receive the full amount owing on the note. Your buyer may not realize this and refuse to pay the amount owing, saying that all you can do is take the property back.
If your buyer has no other assets that could be applied to paying off the deficiency, your buyer may be right. Legally you have an enforceable promise. In practical terms, however, you would be wasting your time, money, and effort trying to collect. It's the old saying “You can't squeeze blood out of a turnip”.
However, if your buyer owns other assets that can be attached, you may be delighted to collect all the money your buyer owes you. If you have not obtained a Financial Statement from the buyer, you will have no financial information on the buyer, and no right to obtain it at this stage.
The obvious cure for this situation is to have created the note correctly to begin with. The prudent seller will obtain a Financial Statement from the buyer before selling the property. Then you will have valuable information you need to collect a deficiency should one arise.
In the event of a default, your first step is to inform your buyer that you intend to seek full payment on the note. If your buyer has assets to protect, once they understand their personal liability, they will probably pay.
If you are faced with a deficiency, you need to be on guard and not lose your presence of mind. Most buyers will act honorably and pay everything they owe. But you need to be aware of a strategy that can be used to avoid paying the deficiency. Your buyer may approach you with the offer to give the property back to you through a “deed in lieu of foreclosure”. This is a common, fast, inexpensive way to give property back when your buyer falls into financial trouble. If the property has maintained its value, this could be the best choice.
But, if the property has lost value and there is a deficiency, it can be a bad thing for you to do. Once you accept the deed in lieu of foreclosure, the property is yours. You may have given up your legal right to collect any more money from your buyer. A smart buyer may prey on your ignorance and try to get out of paying a deficiency by offering you this easy alternative. You may be so eager to solve the problem you neglect to ask your attorney about collecting the deficiency.
When you seller-finance, you should obtain a Financial Statement from the buyer. You should also consult an attorney before selling the property, and again in the event of a default by your buyer.