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Is a Take-Back A Safe Option?

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Posted On: 03/25/2015

QUESTION:

With investments earning such low returns, it seems like a seller take-back would offer a good, safe return for the bulk of my money. If there’s a sizable down payment, somebody that couldn’t qualify for a bank loan (due to their income not being documented according to IRS rules) could still be financially able to make payments. The fact that they have a sizable down payment invested would guarantee that they would continue making payments. If the contract was written by a real estate lawyer, I would be able to take the property back if the buyer went into default, wouldn’t I?

ANSWER:

The use of seller take-backs is as old as real estate. In such situations the seller provides some or all of the required financing for a buyer who cannot get a mortgage. From the seller’s perspective the idea is to get a higher sale price and ongoing income from the note.

A big down payment, paperwork written by an attorney and properly recorded documents take a lot of risk out of the transaction. That said, take-backs are not risk-free transactions.

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First, if you as an owner finance the sale, then how much capital do you have to buy a replacement property? Second, a big down payment and proper paperwork provide defenses in the event of default, but they do not end the possibility of loss, nor do they guarantee a quick resolution.

Let’s imagine that Buyer Smith purchases your home with 30 percent down. The house costs $300,000 so the down payment is $90,000 and you take-back a $210,000 mortgage. What could possibly go wrong?

Imagine that in six months Smith doesn’t pay. The stream of income from the transaction is now gone. If you need that money, Smith’s problems are now your problems.

You foreclose. Last summer RealtyTrac reported that in the second quarter of 2014 the average time to complete a foreclosure was 577 days. Your ability to foreclose is not instant or immediate. It will take more than 18 months in most jurisdictions to reclaim your home. Meanwhile, the property will yield no income, even as legal bills pile up.

Once the property is foreclosed you may still not get it back because of squatters. It may be necessary to have a sheriff remove the current occupants, and that can take a considerable amount of time.

Lastly, when you do get the property back will it be in pristine condition? It could cost large sums of money to make the property salable or rentable again.

It’s argued that a seller take-back might be useful for a buyer who has not declared all of their income to the IRS, but if someone is willing to cheat the IRS why would they not be willing to cheat you?

In today’s marketplace mortgages are remarkably cheap. If a buyer wants your property that’s great: let them get financing from a lender, give you a check at closing, and let the lender worry about whether the buyer pays or doesn’t pay.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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