If your seller-financed home sale isn't going according to plan, there are options for recovery. Depending on the paperwork you signed at the deal's inception and what state the property is located in, you may have a few options. For example, in a forfeiture proceeding, if the buyer can make up the missed payments, you can opt to continue to deal. If not, there are two foreclosure possibilities to consider.
The Notice of Default
Foreclosure begins when the beneficiary, the seller, notifies the trustee that the trustor, the buyer, has defaulted on the promissory note and deed of trust. This information includes the amount currently due, the total unpaid mortgage balance and the date that the trustor became delinquent. The beneficiary orders the trustee to send a notice of default to the trustor, and is recorded in the county clerk's office -- where the original sale documents reside. It must also be printed in a newspaper.
By paying the amount due in full, the trustor can stop a foreclosure action. This amount includes any attorney fees that the beneficiary has incurred as a result of the action. If this occurs, and the trustor resumes timely payments, the sale is reinstated.
If the original terms do not include a "power of sale" provision, then the beneficiary must sue the trustor in court. If the court sides with the beneficiary, a public sale is ordered. A period of time is allowed to pass before the sale occurs -- the amount of time depends on the state -- to allow the trustor time to make up the missed payments. The beneficiary is usually permitted to repurchase the home at auction, and is often the only bidder, but is always sold to the highest bidder. Notice of the sale is printed in the newspaper and is sent to the last known address of the trustor.
The trustor also has the right to purchase the home at auction. However, trustors who are considering this route must remember that doing this may result in a deficiency judgment being levied against them -- meaning, the trustor would be responsible for paying the difference between the auction price and the original sale price.
If the trustor has defaulted on an obligation that contains a power of sale clause, the beneficiary has the right to order the trustee to initiate a non-judicial foreclosure. Just like a judicial foreclosure, a notice of default is prepared by the trustee and sent to the trustor. If the trustor is not able or willing to make up the missed payments during the reinstatement period -- usually 90 days -- the trustee records a Notice of Trustee's Sale in the county clerk's office. It must also be published in a local paper, along with a sign that's placed on the trustor's property.
The courts are not included in a non-judicial foreclosure. As a result, it's faster and less expensive than a judicial proceeding. Deficiency judgments are not permissible in non-judicial foreclosures, even if the sale proceeds are not sufficient to repay the loan in full.
In both judicial and non-judicial foreclosure, the trustor does not have to pay the beneficiary rent during the default period, even if there is a rent provision in the sale agreement -- enforcement is difficult. If there is a provision in the sale agreement, if the property is generating rental income, the beneficiary may be entitled to it; absent that, he may not. Each state has different laws, so it's important to consult with a real estate attorney to review your state's rules. One of the advantages of seller financing is the elimination of the banking industry's red tape; you may be able to use this to your advantage by reaching a new agreement with your buyer, instead of foreclosing.
- "The Washington Post"; Why Seller Financing Should Be a Last Resort; Benny L. Kass; May 2008
- "The Federal Reserve Bank of Minneapolis"; Risks and Realities of the Contract for Deed; Crystal Myslajek; January 2009
- "The Wall Street Journal"; The Pros and Cons of Financing a Mortgage; Gene J. Koprowski; February 2004
Lisa Bigelow is an independent writer with prior professional experience in the finance and fitness industries. She also writes a well-regarded political commentary column published in Fairfield, New Haven and Westchester counties in the New York City metro area.