What Happens If a Seller-Financed Homebuyer Decides to Sell Before Their House Is Paid off?

One of the fundamental rights of real estate ownership is the ability to sell your interest in it. If you've bought a house from a previous owner, even if he's financing it for you, it's yours to sell. Generally, the only limitation on your right to sell would come from a lockout clause or prepayment penalty in the financing, just as would happen with a similarly written mortgage from a traditional lender.

There are two types of seller financing where the buyer actually buys the home. In a situation where the seller carries back a mortgage, the buyer holds the deed to the property and the seller's position is legally similar to that of a bank. With contract for deed transactions, the original owner technically holds the legal title until the contract gets paid off, but the buyer has the burdens and rights of ownership, including the right to sell. When a contract buyer sells the house, the new buyer's money is used to pay off the contract, removing the original seller from the chain of title.

Lease options are different. When a tenant moves into a house on a lease option, they've only bought the right to buy the house on a future date. Since they technically aren't owners, they don't have anything to sell. As such, their ability to sell the house is really based on their ability to sell their rights under the option. Otherwise, a lease option owner can always execute their option, then sell the house.

One of the primary reasons owners provide financing is to avoid paying a large lump sum of taxes on the sale of their property. Owner financing allows them to spread their tax liability over a period of years. An early prepayment, though, could require them to pay off all of their tax liability in a lump sum. To prevent this, some owners will write prepayment penalties into their owner-financed contracts. If this is present in your agreement, you'll have to decide whether or not it still makes sense to sell after paying the penalty.

Some sellers would love to be paid off early. While receiving monthly payments might have seemed like a good opportunity at the time they made the loan, over time, seller's may need the cash. Calling the original seller to see if they'd be interested in being paid off early will give you the opportunity to take their temperature. If they're eager for the money, you might even be able to negotiate a lower payoff amount, letting you keep more of the money that you're able to get for the house.