How would you structure this owner financed deal?

Question

I own my home outright in Illinois. Its for sale by owner. I got an offer for full listing price with 25% down and the remaining balance payable in 6 monthly payments.

My attorney says he would prefer to structure it as a contract for deed but  the buyers contract is written to give full ownership to the buyer immediately and I would be the mortgage holder.  Attorney says current contract is fine because illinois law gives ownership rights on contact for deed sales after 20% of the principle has been paid.  If the buyer defaults then i would have to go through foreclosure process either way.

I’m still learning and this would be my first home sale without a realtor and I want to make sure I’m not making a raw deal. I paid for some background check info on husband and wife buyers (sale is in wife’s name only) I discovered a default about 12 years ago on a home loan and the husband owes the IRS $800,000 plus.  I’m waiting on a credit report but buyer says credit is over 700 on both. Buyer says irs deal is completely in accurate and he is working to get it fixed.

Any advice or insight would be greatly appreciated!

Greg Scott · Answer

@James Fleisch

Thanks for the added info.

Many banks won't make loans on houses under $50K so that my be driving some of this.  (Credit Unions are more friendly towards sub $50K houses)

I think Account Closed has some good advice here.  I'd probably push hard to stay with a contract for deed route.  As a concession, you may give them the flexibility to have the house paid off over a longer time frame.  (Six months is unusual.)  Even if you make it 12 or 24 months, that is pretty quick and you have much greater protections under contract for deed in case they stop paying.

Congrats on buying it right.  Looks like you will make a nice return on this property.

Account Closed · Answer

@James Fleisch I have worked on quite a few of these types of cases. Going into my first few, I thought this would be a bad idea because it has all the makings to be a bad deal. However, surprisingly, the deals where the buyers actually were going to live in in the house ended up working out.

From your attorney's perspective, you should structure it as an contract for deed as the equitable title would be conveyed immediately but the actual title would convey down the line. This is clearly preferred for the Seller. However, there are some additional safeguards you need to put into place as the Buyer can record their deed, which would then create a cloud on title, which you'd need to bring an action to clear up.

From the Buyer's perspective, they would prefer the other route, which is deed conveyed immediately and you hold a note and mortgage. This way, they own the property and just like any other lender, you have the right to foreclose. In this event, a year or two may elapse before your able to take possession.

There are reasons you go one way or the other. An important factor is how significant is the initial payment at closing. If it is a large amount, where your risk is covered if they don't make the second payment, then it is worth you going that route and if the Buyer defaults, you foreclose and keep the initial deposit (most likely).

James Fleisch · Answer

@Greg Scott

Home price is $47,000 with $12,000 down at closing and $5,000 monthly for 7 months. The buyers both run a home business and own 3 other properties and supposedly had to relocate to wife’s hometown to care for an elderly mother.  They want my house because its large and has room for home business.  I only paid $16,000 for the house 3 years ago but would prefer to not get into a foreclosure mess. Lawyer says its fine but didn’t really explain the foreclosure process or give me any idea how much it might cost.  I’m getting credit reports Monday that are supposed to be stellar along with some proof of income and cashflow.  Just trying to make sure I’m not missing anything and if it goes bad that i can still come out ok even if it takes a year.

Thanks!

Greg Scott · Answer

Boy, red flags are going up all over the place.

It seems odd that they can pay for the whole house off in 6 months.  You didn't say, but how expensive is this place Unless this is a very cheap house, this appears to be a heck of a lot of cash each month from someone who is struggling to get a bank loan.  Don't you think if they had that much cash they could get a loan?  Why don't they?

If they have that much cash coming in, why don't they rent for a few months and then they can pay cash for whichever house they want?  The IRS issue in his name and putting the property in her name only raise more suspicions.

Personally, I would do everything my lawyer says, and then ask him about my concerns and see if I should do even more to protect myself.

BE VERY CAREFUL OR RISK GETTING BURNED