Never Do a Seller Financing Deal Like This… (Rookie Reply)

0:00What happens if you go to sell a property, but the buyer backs out? Or what if you do a seller finance deal and the buyer stops making payments? Today, we're breaking down three questions every rookie investor needs to hear from selling a property to renting it out.

0:19This is The Real Estate Rookie Podcast. I'm Ashley Kerr. And I'm Tony J. Robinson. And with that, let's get into today's first question. So today's first question comes from Michael in the BP forums. And Michael says, buyer defaults after extension. Enforce our EMD or keep waiting. So Michael says, I listed a property recently that got about 20 showings in the first week, but only one offer. It went under contract with a relatively small non-refundable deposit in a short closing timeline. It's been 55 days. It was supposed to be 25, but now we're on day 55 and counting. The buyer missed the original close date, asked for an extension, and I agreed.

0:55The new closing date has now also passed with no closing. but the buyer still only has a conditional loan approval. And I later found out they withheld a material fact that impacted their financing. They're offering just a token increase to the deposit. And my realtor is encouraging me to give them more time since there weren't multiple offers. So here are my concerns. First, the contract has technically expired after the extension. Second, the deposit is small and currently second escrow. Third, buyer hasn't been transparent about their situation. Fourth, I don't want to lose more time off market, but I also know the layout limits the buyer pool.

1:29And then fifth, I could, in theory, always draft a retroactive extension if they really got their financing together later. So the question is, if you were in my shoes, would you enforce the contract and relist now or grant one final short extension, but only with a substantial non-refundable deposit? It's a great question. We've actually never really tackled it from the seller's side, right? But as real estate investors, sometimes we do sell real estate as well, right? We're not just always buying. I guess, what's your initial, I guess, before we even talk about your take, Ashley, just what should we be considering before we make that decision?

2:04Today's market conditions. I think that if you would have asked me two years ago, I'd say, move on to the next buyer. Don't waste time with this person. But Tony and I both have properties that have sat on market for a very long time. And you might not find that other buyer right away. And you might sit longer than you would if you give them an extension. Or if you give the extension and it still falls out, I feel like it's probably going to impact you the same, even if you wait a little bit longer. Also, seasonality. So for example, in Buffalo, New York, we're getting into the winter months were definitely a slowdown too.

2:50So maybe if there's a huge slowdown in your market too, people aren't moving as much in winter, looking to buy houses that maybe it is, you're in more of a rush to get it offloaded or maybe you are going to do the extension and then if it doesn't work out, take it off market and relist it back in the springtime when hopefully the market does see a little bit of a boost as it usually does. So that would be my first thinking point as to what are the market conditions. I think the other thing to consider too is how badly do you want to sell? What is your motivation for selling? Did you list this property just because you're like, I'll test the market and if it sells, great.

3:31If it doesn't, no harm, no foul. Or is it like, I've got a hard money note that's due in seven days and if I don't pay this thing, then I've got to go back and renegotiate and there's all these additional fees. What is your motivation for selling here and how much pressure do you have? to actually disposition this asset. Because obviously, the less pressure you have, the more you can hold out on actually getting someone who might be able to get it to the closing table. But if there's a lot of pressure there, then maybe you've got to move more quickly and go with the more sure bet. So I think that's one thing to consider.

4:01The other thing I would try and really understand is, okay, realistically, what are the chances of this buyer closing? What was the original reason that the closing has to be extended? They kind of mentioned some issues around financing, have those issues been resolved? Or is it still an open item where they're like, maybe we've got this done? But if they're like, hey, no, we've got it done. We're just waiting on this last thing. We need A, B, and C, but we feel pretty good about getting there. Then maybe that changes the decision-making process as well. But those are the two big things I would look at.

4:34Your personal situation, what's revenue to sell? How realistic is it now that the buyer has solved these issues and they can actually get to the closing table? But I think based on what's in front of us, Ashley, I would probably give this buyer one more chance. Because if you – he said 20 showings with one offer, right? It's not a terrible ratio, but it's also not great. It means you need another 20 showings to maybe get one more offer. But maybe you don't even get another one, right? You said the layout is maybe a potential issue here. So it's like if you relist, now people kind of smell blood in the water, right?

5:13It's like, hey, we saw this property go under contract. It was under contract for a long time. Then it fell out of contract. People don't even know why it fell out of contract. They'll just think that something was wrong with the property, right? That's everyone's initial take. It's like, oh, well, this buyer didn't want it. So it must mean that's why it's back on the market. So now let me lowball you with something else. It's got that stain on it. It's got the stain on it, right? There's a stigma around properties that have been relisted. So I think there's some challenges there with going back onto the market.

5:39But I do like the idea of increasing the non-refundable deposit. Because if this buyer is serious, ask them to majorly up whatever their non-refundable deposit is. And if they have confidence that it's going to go through, and if they won't up it, then that probably shows that they're not even certain. But also I would like try to like get face or not face to face, but like think about the chain of people that you play telephone with real estate agents. So, you know, what is the actual issue if there is a way for you to contact, you know, email or something, the buyer directly and say, hey, what's the issue?

6:17I'd love to work out something, you know, to get this to work out. how can I help, you know, and see if maybe they'll say, oh, well, my financing is, you know, caught up because of this or that. And it's like, they can show you, I just need a little bit more time, but it's going to work out. Or maybe it's something else that, you know, you actually could help with or whatever to move it along. Or maybe you could change, offer to change the terms of the contract in some way. But I think that's like a, you know, actually understanding, like Tony said why it isn't closing. What is the actual underlying issue?

6:56Okay, we're going to take a short break, but coming up, what happens if you offer seller financing? You want to make the interest instead of the bank, but the buyer stops paying. We will hear this investor's horror story when we come back right after this quick break. You just realized your business needed to hire someone yesterday. How can you find amazing candidates fast, easy, just use Indeed. When it comes to hiring, Indeed is all you need. That means you can stop struggling to get your job notice on other job sites. Indeed's sponsored job posts help you stand out and hire the right people quickly.

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10:40So this question comes from the BiggerPockets forums. I'm currently in the middle of a serious situation with a seller finance deal gone completely sideways. The buyers stopped paying, secretly turned the property into an Airbnb without my knowledge and eventually defaulted, leaving me with a huge unpaid balance, property damage, and a legal mess trying to remove them. Even worse, the family renting the home through Airbnb was completely unaware and now caught in the middle. I've signed a legal lease with them to protect their housing, but I'm still stuck pursuing the original buyers for breach of contract, trespassing, and damages.

11:17At this point, I've paid a$5 ,000 legal retainer. The buyers owe over$18 ,000 in missed payments. Damages include a kicked-in door, scratched interior doors from pets, damaged siding, and HVAC tampering. and now they've taken up residency in the basement when the original buyers tried to call the cops on the ones living in the property due to not receiving payments from Airbnb anymore. So they are squatting in the basement even though they have never lived there. I'm moving forward with legal action, but I'm sharing here to ask, has anyone dealt with something similar under a contract for deed?

11:52Any advice on how to frame damages and force against unauthorized occupancy? How did your legal process play out if you couldn't recover funds from the other party? So then he goes on to say this sounds like a nightmare, and it definitely does. I think the first thing I want to clarify here is to, talks about the squatters in the basement and talks about original buyers. So it sounds like the folks who bought this on the seller finance note have moved into the basement and they're squatting there because the Airbnb family realized what was going on. Instead of paying Airbnb who would then pay this guy who wasn't paying the mortgage payments, they're now just paying the landlord directly for the Airbnb that they're staying in.

12:41So the buyers got mad and basically are now squatting in the property as a middle finger to both of them. This is a crazy situation. What is that guy's name that made national news where he was ex-military and you could hire him and his friends and they would move into the property armed and just be as annoying as possible to make the squatters move out? I'm sure if you Google it. I mean, but there's two separate issues here, right? There's the squatting issue and there's the seller finance, not even seller finance. This is a sub two deal, right? And let's just quickly define those differences.

13:25Seller financing in the general sense is I own a property free and clear and I'm going to sell it for Ashley and I'm going to finance those payments for Ashley. So instead of Ashley going out to Bank of America or Chase and getting a mortgage to pay, right? So instead of 20 % down and 80 % being funded by Bank of America, Ash is going to give me the 20 % down payment, and then I'm going to let her spread the other 80 % out in payments over some predetermined period of time. That's seller financing. Subject two is when same property, but I've got a mortgage on it, and I'm going to let Ashley buy it subject to the existing mortgage.

14:03So what that means is Ashley comes in. She still maybe gives me a down payment of some sort, right? But then she takes over payments on the loan. My name, everything that I did still stays in place, but now actually it's making those payments on my behalf. And I'm able to kind of, quote unquote, step away from the property. Now, I still have the debt tied to it. And depending on how they set this deal up, maybe my name is or is not on title. But that's the difference between sub two and seller finance. Seller financing means there's no debt, traditional debt. And sub two means the original debt is still in place.

14:34So with seller financing, let's say I sold a property to Tony and I decided to seller finance. He's making payments to me. He stops making payments. The property is free and clear, so I'm not that worried about a ton of holding costs. I have to go through the foreclosure process. Or I've seen investors negotiate and basically do a cash for keys or just sign the deed back over to me. We'll skip the foreclosure thing. Here's five grand or something to do that. but you go through the foreclosure process. But sub two, you are not the owner of the property, but the debt is still in your name. So Tony stops making payments to my lender.

15:16The lender is coming after me, not Tony for those payments. So I have to, in the meantime, keep paying my payment so my credit doesn't get destroyed and go ahead and start the costly foreclosure process. Well, actually, no, you can't even foreclose on them because they don't own you any debt. So go after them for legal action, but I don't even know where to start. I wouldn't either. And I think that's the tricky part of this is that you're fighting two things, right? There's the money owed for the sub two transaction. And then there's the squatting issue as well. I would probably go after the, but actually, can they even squat?

16:01I don't even know if it's squatting because their name is on the title now. I mean, man, it is a really tricky situation. I think the first thing that I would do, and it sounds like you've already started this, right? 5K in legal retaining or 5K to you retain an attorney. I don't even know if I could do anything else or offer any advice above and beyond that, because it's like, what legal standing do you have? I would assume, I would hope that there was a really rock solid contract in place when this transaction happened and they mentioned contract for deed. So hopefully whatever that is gives you the legal protection to actually go after these folks.

16:35But either way, it sounds like it's going to be a long and lengthy battle with no clear cut action, unless you do it ashes where it's like, hey, instead of me paying this attorney$20 ,000 to solve all this, let me just pay you, person who I'm not super fond of right now, let me just pay you 20K and let's be done with this. Sign everything back over to me, move out and be done. That might be the best option. Another thing that I would be fearful of is, so he says he signed a legal lease with the tenants that are in there, but is it actually a legal lease because he has no right to the property?

17:13So at any time, the people that actually own the property could say like, that's not. So technically the Airbnb people could be squatting and the owners of the property could take legal action against them. Very true. But again, we don't know the details of the contract. So maybe title hasn't shifted yet. And I think if it hasn't, then that obviously changes things a ton because now you still have legal standing as the owner. To go through and do an eviction on them. an eviction, right? But if you're just a lien holder, like I've got a mortgage with PennyMac, PennyMac can't sign a lease for my properties and execute those things.

17:49Only I can. So there's a lot of nuance here. And yeah, cash for keys, getting an attorney, those are the really only paths that I'm aware of that would be beneficial here. Basically, what I feel like if for sub two, it's basically me co-signing for somebody. So like, think about like, you know, you, you want to go and buy a car when you're young and you can't, the bank says you have no credit. You got to get a co-signer. So grandma's like, oh, don't worry, sweetie, I'll co-sign for you. And grandma co-signs. And then you stop making the payments. Grandma can't, you're the only one on title of the car.

18:28Grandma can't take your car away but she still has to make the payments because she's liable in that sense. So basically when you do sub two to someone, unless there's a Pace Morby way that I'm sure he has this all figured out, maybe this question should go to Pace, who's the expert in sub two, as to what you do on the other side of it. I think we hear a lot of stories about people buying houses using sub two as a strategy. But very rarely am I hearing in the investing world where you sell a property sub two as an investor. So I don't have a ton of experience in this as to what would happen. Yeah.

19:12And honestly, I feel like this is becoming something that I'm hearing more of though, where some of these sub two deals are going sideways for the sellers. Because I I mean, depending on the situation, maybe these guys got into the deal with no money out of pocket. They've got no debt in their own name. The motivation for them to stick with the deal if things go sideways is very low because they've got nothing on the line. When you talk about skin in the game, they've essentially got none. And unless they're just a person of high integrity, which it seems like these people are not, it becomes I think a lot easier for them to walk away and put the the sellers in a pretty sticky situation so man it's a rough one and like a big thing I have seen like in forum posts and on social media is like people say like all like ask to do sub two because there's people that are in a position where they have no other choice and like there's never I never see anything or I've never been educated about like protections for that person.

20:14And I know like in sub two, like you're supposed to do things like through a trust or things like that. But, and I don't know if that protects the seller, but usually it's like the seller's backed in a corner. They have no other choice in their life to do something with this property. They're underwater or whatever may be happening. They can't sell it and you're coming in and saving them. But what happens if you can't make the payments anymore. What happens to them? Yeah. Tricky, tricky. Not often that Ash and I get a question where we're like, man, this just sucks. But I think this might be one of those situations where unfortunately not a whole heck of a lot we can do.

20:52All right, guys, we're going to jump into our last question in just a moment, but we're going to take a quick break first. And while we're gone, if you haven't yet subscribed to the Real Estate Rookie YouTube channel, be sure to do that. You can find us at Real Estate Rookie, and we'll be back with more right after this. Did you know you can go on vacation and actually earn money? Because while you're out exploring new horizons, your home is sitting there dark, silent, and wildly underemployed. And it could be making you extra cash. And Airbnb makes that possible with something called the co-host network.

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