Foreclosing on a Seller-Financed Property

When you finance a property for the buyer, your rights depend on the type of financing you offer. Technically, the only type of seller-financing that requires foreclosure is when you actually sell the property and take back a mortgage. Contract for deed seller financing and lease options let you take the property back without going through a formal foreclosure.

If your seller financing is structured as a mortgage or a trust deed, you'll be subject to the same rules as any other lender. While foreclosure laws vary from state to state, you'll usually have to wait for the buyer to start defaulting on payments. Once the buyer doesn't make a few payments, you can send a notice of default. Then, you either publish the foreclosure notice or file a court case. During all of this time, the owner of your home is usually occupying it without paying you. Once the foreclosure process completes, a sale is held and you get the proceeds of the sale while the new buyer gets the property. With time for the original buyer to stay in the house and make up the loan payments, a foreclosure can take anywhere from a few months to well over a year.

If you let the buyer finance most of the property but you carried back a second mortgage, you also have the right to foreclose. However, foreclosing on the second usually triggers action from the first mortgage lender. If you don't have the ability to pay off the first, that lender could end up taking all of the proceeds when you send the house to a sheriff's sale, leaving nothing for you.

Contracts for deed, land contracts and installment sales are all different names for the same basic owner financing arrangement. In one of these transactions, the buyer gets the right to the house, but you hold on to the legal title. If the buyer doesn't make the payments, your ability to take back the property depends on your state's law.

In North Carolina, they're treated like mortgages, especially if they're recorded. There, the buyer's right to redeem a contract trumps any forfeiture provisions in the contract. Michigan allows the owner that finances a property to attempt to take back a property in as little as 15 days after the buyer receives notice that she's in default. This method leads to a court hearing that can give the buyer an additional 90 or 180 days to fix the default. Minnesota law allows owners to cancel a contract immediately upon a buyer's default, although the buyer will have 60 days to fix the default before losing her rights under the contract.

Lease options or rent-to-buy properties make it easy for owners to foreclose on the contract. Since the buyer is a tenant of the property, his ability to stay in the property is covered by landlord-tenant law. If he doesn't pay, the landlord can evict him. The option fee and any extra money that the tenant pays towards the purchase of the property are governed by the terms of the contract. For instance, if the contract says that the owner can cancel the option and keep the tenant's money if the rent gets paid late, the tenant will have little or no recourse.