Lease purchase deal gone terribly wrong...

26 Replies

In 2005, I went into an agreement to sell a property I owned that had a mortgage on it. The agreement was basically written out on a standard residential sales agreement with the terms of the owner financing (me) spelled out to the seller. $75k (fmv) $2100 was put down, with the terms of 8% over 15 years. The mortgage on the property was also 15 years for about 7%. The buyer agreed to pay P&I plus taxes, insurance and water utility directly to me as nothing was being changed over or transferred (or recorded) until the loan had been satisfied 15 years later. So on paper I was the owner, and her only interest was in the piece of paper we had signed and had notarized. All was well until the buyer lost their job and stop making payments, I knew this person to be descent so I gave them some months to get back on their feet before I pursued getting the house back. Now almost 16 months later nothing. Now the dilemma I sent the quit letter, went to tenant / landlord dept in Philadelphia but buyer is not a tenant so can't evict. I have been paying my mortgage as not to mess with my credit but it is a financial hardship. Really don't have money for excessive attorney fees, and can't find the low cost ones who work with the owner not the tenant. What are my options?

Offer her money to get out (cash for keys).  It might be cheaper than hiring an attorney.

So essentially you did a contract for deed arrangement, correct? You did not deed the property to your buyer? Was there a "lease" or rental agreement anywhere in your paperwork? 

Your buyer hasn't paid in 16 months. Seriously? And you've been paying her water bill all this time?

It sounds like your paperwork is a mess and you need legal help to sort it out.  You might need to sue on the contract. Then once you have a judgement, your buyer is a tenant-at-will that can be evicted.

Have you considered trying to make a deal with the buyer to get the property sold? If she bought in 2005 she probably has built up some equity. Sell the property and mortgage would get paid off and she would get some cash.

You also have the option to sell the property subject to the existing mortgage and the existing contract agreement, assuming you could find a buyer.

@ K. Marie Poe, the property was not deeded to the buyer, there was no lease or rental stipulations, I had no idea when we filled out the sales agreement what was the right way to do it, She has stop communicating. I had a lawyer send her a letter, with no response just that she received it per the certified receipt from the post office. One lawyer said I need to file breach of contract with ejectment action, another said it need to be handled like a foreclosure, because of this conflict in direction, I have gotten real confused. Would a real estate agent sale the house if they can't have access? Unlike much of the real estate market it has appreciated above the original sales price.

@Paula Smith   yep, you've done a "contract for deed" aka "land contract".  Unfortunately the legal status of these varies from state to state.  They're something of a no-mans-land  between a lease/option (which is ultimate a lease with a tenant) and an owner carried mortgage (where you have a borrower).  So whether it requires a foreclosure, an eviction or something else is going to be very state specific.  @Steve Babiak is in PA and might have a better idea.  Bottom line is that you need a lawyer familiar with PA land contracts.

Sounds like the spirit of the contract is a contract for deed.

Where you pay on a contract when you get the deed to do the road.

You need a court proceeding with the judge ruling that the contract needs to be set aside.

And then you need rights of possession.

That's a foreclosure. If it's something else something else.

You need to go to court hearing now.

@Paula Smith  I'm not surprised that you are getting conflicting legal ideas.  You don't appear to have a properly prepared contract for deed agreement.  Rather it seems to be some kind of purchase agreement with installment payments. IMO you don't have anything to "foreclose" on.  You do have an agreement or contract on which the buyer has defaulted, so if it we were me, that's the angle I would go with.  Just a filing of the case and getting served a summons might be enough to get the buyer to wake up.

14 months is a long time and now your buyer is used to not making a housing payment.  I doubt you'll get any response from her without suing.  Can you stop paying the water bill?  Or is that included in your tax bill?

Selling the property subject to the existing mortgage and defaulted agreement isn't a typical sale and not something you could easily list with an agent.  It's more of an investor type purchase.  There are problem solving buyers in every market for almost any kind of deal as long there is a potential for profit.

Does the buyer owe you anything at this point? Or are you just trying to get the mortgage paid off? What are the numbers?  How much is the property worth today?  How much is the existing mortgage? 

@ K. Marie Poe Thanks Everyone all your responses have been helpful and insightful. , the balance of my existing mortgage is $37k, based on Zillow the house is valued at $120k but I will say more like $100-110k not knowing what kind of condition the buyer has maintained it in. I stop paying the water in October 2013, but it does run with the property in Philadelphia, so I have received some shut off notices and threats of a $600 dollar lien for the unpaid bill. As far, if the buyer owes me anything, well I guess not if I'm not entitled to any of the past payments that were not made, something like $12k. The whole ordeal has left a bad taste, but I guess its my own fault for not being better educated about the best way to handle these kinds of dealings.

Question - who did your paperwork for this deal? They told you it was a lease option?

@Paula Smith  

I am so sorry that this has happened to you. Sometimes we have to learn the hard way the right way to do business. I am not saying this to make you feel bad, but rather to remind you that we have all made mistakes and that you are doing the right thing by coming here and speaking to attorneys to seek solutions.

The laws vary from state to state, and the reason why you may be getting different answers is because sometimes there are overlapping statutes that may be applicable to this rather vague and incomplete document.

It sounds like the spirit of the contract is 'seller financing' with you acting as the bank... But without the complete documents as Kristine Marie Poe pointed out. Ultmiately, it may be up to a judge to determine the relevancy of rights your 'tenant' has. Remember, in her mind, she has bought a house. The way she views the transaction may be the best way to untangle this all... 

 However, let's take a quick look at her motivations and situation...

   She has no money and currently (for 16 months!) has been provided a free place to live! She has it cushy right now... It is time to stop thinking like a friend and start thinking like the bank that you are... Would Chase sit around, send out a letter and then not follow up with legal action? No, they wouldn't. They would be on her until she paid up or was out!

In reality, since you are not Chase bank, I would take a two pronged approach... I would send her a letter, do a filing with the court (SOMETHING just to get the ball moving and to let her know you are serious), make her anxious that her cushy ride was about to be over... And then give her the option to get her down-payment (or whatever you deem to be a motivating amount) back if she moves out within 30 days. I would also have her sign a disclaimer that you no longer be held liable for any other action regarding this matter, her interest in the property, ect. In other words, CYA!!!

I would also speak to another attorney and follow-up with the ones you have already spoken with via email about why they think your case should be handled in that way. Explain that you have received two conflicting ideas and ask them their rationale for their approach. It could be that they are both missing a piece of information that the other is seeing. And you will have more information to help you move forward.

Good luck! :)

@ Casey Carroll - I just took Residential sales agreement from the internet, added (wrote in) the terms of the payments and me and the buyer signed and had it notarized. No others were involved

@Tiffany Plovie I will take your advice under consideration, I guess the biggest delay was that I was dealing with this situation personally rather than business like, and need to put the personal aside and handle the business at hand

Originally posted by @Paula Smith :

@ K. Marie Poe Thanks Everyone all your responses have been helpful and insightful. , the balance of my existing mortgage is $37k, based on Zillow the house is valued at $120k but I will say more like $100-110k not knowing what kind of condition the buyer has maintained it in. I stop paying the water in October 2013, but it does run with the property in Philadelphia, so I have received some shut off notices and threats of a $600 dollar lien for the unpaid bill. As far, if the buyer owes me anything, well I guess not if I'm not entitled to any of the past payments that were not made, something like $12k. The whole ordeal has left a bad taste, but I guess its my own fault for not being better educated about the best way to handle these kinds of dealings.

If it were me, I'd continue to accept the risk of the water lien and let the water get shut off. Your buyer isn't a tenant so I doubt she has recourse against you.  Likely she does not have the necessary cash to payoff the lien and bring the account current.  And the water utility might not let her anyway, since she's not the owner. 

I'd also sue asap on breach of the agreement.  That, coupled with the water shut off, might be the wake up call your buyer needs to bring her to the negotiating table.  

I'd do whatever I could to settle this with your buyer as opposed to let it play out all the way in court.  Because your paperwork is a mess, the judge may end up in the position of deciding who the equity belongs to.  You're the owner, but your buyer created some of the equity by paying the mortgage for 8+ years. I realize that you did not intentionally create an agreement in your favor, but I'd not want to be standing in front of a judge on that one.  Just my opinions here.

I'd use the filing of the case and serving the summons to hopefully facilitate a settlement of some kind.  

@Paula Smith

It seems like it would have been easier if you did transfer the deed, then I guess all you would have to do is foreclose on the property.

I hope it all works out, I am not a fan of having to get help from a lawyer at all.

At least the note got paid down for all those years.

I just took Residential sales agreement from the internet, added (wrote in) the terms of the payments and me and the buyer signed and had it notarized. No others were involved

No attorneys?  Then you certainly need one now.

PA Installment Land Contract Law:

http://www.legis.state.pa.us/WU01/LI/LI/US/PDF/1965/0/0081..PDF

You probably have to follow the law in terminating the contract for buyer's breach. But I would guess that the seller hasn't fully complied with the law either. After the notice to terminate you will probably have to first foreclose due to the equity that the buyer has accumulated over the 8 or so years out of 15 on the deal; lots of equity passed onto the buyer in this transaction. Upon the foreclosure being completed with a sheriff sale, if nobody bid on it at sheriff sale you will get title back (OK the seller never really lost title in the installment sale, but that buyer equity is at issue). Then after sheriff sale comes the ejectment. None of this goes through landlord tenant court.

I sense large legal bills in the near future.

One think to always remember when it comes to your money its always business never personal. I hope things work out for you and I am sorry that you are going through this but make sure you take away some thing from this so you may be able to help another young investor.

Goodness, I see. Not sure what the paperwork exactly said in your P&S agreement, but it will likely be classified as an installment sale based on the law of your state. For future deals where you are trying to structure an actual lease option agreement, you need three separate documents: First right of purchase, statement of understanding, and residency agreement/lease agreement. I wish you best of luck sorting this current situation out.

Concur with Troy Best.

I think the lesson here is not let your personal 'connection' with the people you are in contract with interfere on what needs to be done. Don't let the long relationship cloud your thinking...'oh they'll catch up,' or 'they've been good tenants for so long'...

I also made this same mistake of letting a long term tenant (~7 yrs) try to get back on their feet, unfortunately ending up not paying ~8 months before finally evicting...

A reminder to pull the trigger when we need to on enforcement of the contract.

Paula Smith, wish you the best and good luck.

I'd get your attorney to provide advice, but it may not be a good idea to turn the water off if there is a possibility that she could be considered a tenant. In Virginia there is jargon to the effect that you are responsible (if you are a landlord) to provide livable conditions and it may cause further problems for you if they say you haven't been providing that even when they haven't been paying you. Also, a delinquency on your water bill is not going to look good on your credit report.

@J Martin I don't travel (much) out of Sacramento-- here is my opinion-- BP people don't shoot me for bad advise (J Martin made me do it).

1) Does your buyer who has been getting a free ride for 1.5yrs (I wish you were my lender :) ) live in the property? If not start an eviction -- that should get your buyer calling you, if they do not call perhaps they are dead or hate the renter?

2) Is the contract recorded? If not then you can sell the property because there is no cloud on the title. Yes you might have a lawsuit later but the damage would be questionable-- See my "crazy idea" below if you choose this adventure.-- Adventure #1

Here is another adventure that you can choose--- Adventure #2 DRIVE OVER TO THE PERSON'S HOUSE & TALK WITH THEM DIRECTLY FORGET THE MAILMAN AND PAY THEM MONEY TO BREAK THE CONTRACT. I would fly out to Philly for you & do this one.

"Crazy idea" Legal work for something like this is not needed IMO -- Do this 1) to get an appraisal 2) sell the property close to the appraisal amount, 3) sort of the money owed & 4) mail your buyer the bal.

Have fun, sounds like you won't loose money (loan pay down is gooood) just years off your life due to the stress

Originally posted by @Dennis Lanni:

Here is another adventure that you can choose--- Adventure #2 DRIVE OVER TO THE PERSON'S HOUSE & TALK WITH THEM DIRECTLY FORGET THE MAILMAN AND PAY THEM MONEY TO BREAK THE CONTRACT. I would fly out to Philly for you & do this one.

"Crazy idea" Legal work for something like this is not needed IMO -- Do this 1) to get an appraisal 2) sell the property close to the appraisal amount, 3) sort of the money owed & 4) mail your buyer the bal.

Have fun, sounds like you won't loose money (loan pay down is gooood) just years off your life due to the stress

 Yes, yes, yes!!! Drive over and talk to them. See where her head is. Perhaps a few grand to move and splitting the equity once the property is sold would get her moving? IF you have to go through legal channels it's going to, most likely, be long and costly. Try short and sweet first. 

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