What Would You Do (Seller Financing Recourse Stipulation)
Not here to evaluate the deal, but to evaluate a stipulation that the seller has.
The numbers of the deal works out to $100 per door on a duplex using seller financing on a free and clear property.
However, during the negotiations the seller comes up with this statement.
"You also need to understand your risk in the event of default on the loan. I understand that isn’t your intention, but in the event of default, I can “foreclose”, and any payments you’ve made will be considered as rent leaving you without an equity position. Also, since the mortgage payment will be significantly less that the rental income from both units, I could sue for the difference. Of course, I hope we would never end up in this situation, but I’m more comfortable knowing you understand these components."
We are in a stable market, but anything can happen during the course of the loan (as all of you know).
I came back and told the seller that I am fine with a full recourse loan, but none of this whole "considered as rent" statement.
She responded with
"However, if the buyer defaults, fails to make a payment for example, many agreements allow the seller to deem the payments “rent” and the agreement a lease. As such, the seller will often then proceed to evict the buyer under the theory that the buyer, now a tenant, has failed to pay rent. This is perfectly legal. In other words, when a buyer defaults - fails to pay a due installment or otherwise breaches another condition of the sales agreement - the seller will now exercise his right to deem the agreement a lease and proceed against the buyer under standard landlord and tenant law. He will evict the buyer and keep all the moneys previously paid. He may even be able to sue for moneys not yet paid.
This paragraph comes right off the Southwestern PA Legal Services website..."
And my final position (where we leave off the story right now) is that I am fine with a full recourse loan, but not the whole "treated as rent" stuff...
So.... What would you do and why?