I Sold My Property on Contract and The Buyer Isn’t Paying. What Can I Do? Exploring Options for Defaults on Seller Financing.

The Problem

Seller financing can be a great option for both the buyer and seller in a lot of circumstances. But, for the seller, there is always risk that the buyer/borrower will fall behind on the payments – sometimes they stop making payments altogether, and other times they fall behind over time by making partial payments or missing payments here and there. Regardless of how it happens, when you’re the seller who isn’t getting paid what’s owed, you eventually have to figure out how to protect your interests. This article will discuss typical options available to a seller in your position.

The Options

Generally speaking, you have two options: 1) take the property back; or, 2) file a lawsuit against the buyer to collect the past due payments. 

1. Taking the Property Back

Most sellers prefer to repossess the property, although that is not always the best option. For example, if the market value of the property has fallen substantially, or if your lien is not in first position (i.e., it’s subordinate to or behind one or more mortgages), it may not be to your advantage to take the property back.

Assuming it is the right approach, however, what are the steps involved in getting the property back? It depends on the type of paperwork used when you sold the property. In Washington, there are two different ways that seller financing is documented and secured: a) Real Estate Contract; or, b) Promissory Note and Deed of Trust.

a. Real Estate Contract

The term “real estate contract”  often gets misused. It does not mean a purchase and sale agreement, but instead refers to a specific type of real estate financing available only in seller financing transactions (as opposed to borrowing from a third party to purchase property or for the purpose of refinancing existing debt). A real estate contract combines in a single document both the buyer/borrower’s agreement to pay the purchase price and the seller’s security interest in the property (when recorded with the county auditor). That security interest is what allows the seller to take back the property in the event of default – a process known as forfeiture in the context of real estate contracts. 

Forfeiture of a real estate contract is a very streamlined process. Essentially, the seller gives the buyer a Notice of Intent to Forfeit, which spells out certain information about the real estate contract and the default as required by statute. If the buyer fails to cure the default within 90 days (i.e., get caught up on the payments), the seller can declare a forfeiture by providing a second notice that also gets recorded with the county auditor.

b. Promissory Note and Deed of Trust 

By contrast, the process of foreclosure of a Deed of Trust is much longer and more complicated. The following is a description of “non-judicial” foreclosure, meaning it happens outside of the court system. I’ll touch on judicial foreclosure in the next section. If the property you sold is the borrower’s residence, the first step is a Notice of Pre-Foreclosure Options, which is required to offer to mediate with the buyer to resolve the default. Assuming the default is not cured at that stage, the next step is a Notice of Default, sent at least 30 days after the Notice of Pre-Foreclosure Options. The Notice of Default describes the property, the Deed of Trust, and the nature and details of the default. If the buyer/borrower does not cure the default within 30 days after receipt of the Notice of Default, the next step is to prepare and deliver two notices simultaneously: Notice of Trustee’s Sale and Notice of Foreclosure. The Notice of Trustee’s Sale describes the buyer/borrower’s obligations and the general nature of the default, and sets a date for a trustee’s sale at least 90 days after the date of the notice. The Notice of Trustee’s Sale must also be recorded with the county auditor. The Notice of Foreclosure gives different and more detailed information regarding the default and steps required to cure the default. In total, the process of foreclosing on a Deed of Trust is required to take at least 180 days from the date of the first default, or 210 days if the property is the buyer/borrower’s residence.

2. Sue for Missed Payments

If forfeiture or foreclosure isn’t the right option, you can simply sue the buyer/borrower for the missed payments. If the Promissory Note signed by the buyer/borrower included an option to accelerate the debt upon default, you may be able to sue for the entire balance owing, instead. You can also include a claim for foreclosure, which would result in a process known as judicial foreclosure – culminating in a sale of the property by the county sheriff. The process of judicial foreclosure can be more complicated than non-judicial foreclosure, because the court is required to confirm the sale price and the buyer/borrower whose interests are foreclosed will have a redemption period of 8 or 12 months during which they can get the property back by paying the debt. Often, the real benefit of suing instead of foreclosing non-judicially is that a judgment against the borrower will result in a lien on other property owned by the borrower. In the right circumstances, this could enable the seller to foreclose on a different property than the one they sold.

Conclusion

This article only describes the basic elements of forfeiture, foreclosure, and suing a borrower. Choosing the right approach for you will require a thoughtful analysis of your particular circumstances. In almost every case, a seller who is not getting paid will need the assistance of an experienced real estate lawyer to help decide on the right approach and to implement it. Fennemore’s attorneys have decades of hands-on experience in this area. Contact us for a consultation.