Seller Financed Future Foreclosure Situation

5 Replies

Good Evening BP,

A friend of mine has a very complicated situation and I wonder if negotiated properly, can it be a deal or can he somehow get out of it without the foreclosure on his credit.

Like many, in 2008 he overpaid for a FSBO property. The property was a probate with the owner now living in CA. Here are the 2008 stats. The property was owner financed for $325,000 with $25,000 down and with is a 10 year balloon for the remaining amount.

The current situation is that the house had work done to it by the previous owners that was not permitted or anywhere near code. For example, the garage was built over a carport. The ARV of the home would be $240,000. The house is outdated and needs to be rehabbed so technically he would need a loan for the that as well. The big icky part of this is that the balloon is due in three years which will be around $267,000 obviously far more than the house is worth. He's being told by a real estate attorney that he should request a deed in lieu of foreclosure. With that said he will get nothing. Is is possible that he can renegotiate or possibly have a short sale with the owner? Sorry this is so winded but it is a tough situation.

-Tiffany

Hi Tiffany,

Your friend should definitely try revising the financing terms with the seller. He does have considerable leverage: Assuming he's been making timely payments, the seller has gotten accustomed to a hassle-free income stream for the last 6+ years. They might be just fine with keeping the "gravy train" running! Likely the last thing they want is the house back, particularly if it has issues that will make it hard to sell.

See if they'll extend the balloon for 5-10 years. He's got nothing to lose.

Oh, and also... fire that lawyer!

Good luck and let us know how it works out!

That's what I said Mitch. He's never missed a payment and has been $1680 a month. I guess the lawyer told him that renegotiation get messy so the deed in lieu of foreclosure was better. Hmmm...no. 

Start negotiations now, not later.  An individual is more likely to want to avoid a foreclosure process.  They also wouldn't "get anything" with a short sale they wouldn't with a DIL.

I agree with Wayne about starting now. I would also add that your numbers don't work...you are stating a value now for a future event and trying to make the math work when it doesn't. What's it gonna be worth in 3 years is anyone's guess but I would venture to say all things equal, probably more.

The borrower bought an as is home, in as is condition. Was there any mention of the permit defects? Did the borrower get a property inspection at the time of the transaction? While there is a certain amount of "Caveat Emptor" in a financial transaction, failure to disclose a known defect might be a cause for renegotiation if not litigation. I'd get an attorney involved with experience in Real Estate and Contracts.

As a side note, the buyer/borrower has three years to right their situation and shouldn't expect the seller (assuming it was an above board transaction with respect to the work that was done) to compensate the buyer's plight. The buyer has lived in it for six years (Or at least owned it for six years) so any "Updating" that hasn't occurred...is on him, not the seller. And if the buyer hasn't put himself into a position where he could refinance himself out of a private note in 10 years by ensuring the property meets guidelines, his income is sufficient, and his credit is sufficient to refinance out of it, then he should bear some of any consequences that may occur as a result.

I agree with both of you. With more information he says he owes the $267k now, not at the end of 3 years. He has also disclosed to me that he bought the home fsbo and did not get a home inspection. I'm sure he wishes he had. Even if the house was in immaculate condition, he would not be able to sell it for $267k or get a loan to refinance. I have a feeling he's going to walk especially since he's retiring in a few months. 

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