Carrying a Mortgage

Today TaxMama® hears from a couple of people in the TaxQuips Forum, with this problem this week.  They have sold real estate on an installment sale. They have been the mortgage-holder. And after a while, the buyer defaulted and they had to repossess the property. Let’s look at the problems arising when carrying a mortgage.
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Dear Family,

With bank and CD rates of return being so low, it is tempting to make investments that provide a seemingly safe, secure, rate of return – guaranteed for several years – and secured by real estate.

So here you are, renting out your house. The tenant has been paying rent diligently for years. They want to buy the house. And you’re ready to sell. What a great deal! No real estate commissions; no need to worry about those pesky escrow fees. Let’s just do a quickie sale, with a fixed interest rate and pull some loan docs off the Internet – and awaaaaay we go!  (Don’t bother with the credit check, or employment check, informing the underlying lender that there’s a new buyer, or ensuring there is enough of a down payment so it hurts if they walk away from the property.)

Oops. Suddenly, they are not paying. To avoid getting foreclosed by the underlying mortgage (oh yes, there’s still one of those), you have to start covering the mortgage payments. They make the random payment…or not. You have no choice. You try to evict them and repossess the house.  Can you imagine? They get mad at you. And they utterly vandalize the house.
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(Yes, that’s one of this week’s situations.) By the time you get the house back, you will have paid out 3-10 times what they paid you – just to get the house back in some order.
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Perhaps you would have been better off letting it go to foreclosure.

Some brief tips:

1) As much as you love and trust them, do a complete credit check – and speak directly to their employer to ensure they will still have a job (that they are not flakes).

2) Don’t carry paper with anyone who is self-employed. If they don’t feel like running their business anymore, it’s really hard for you to collect money from them.

3) Handle the sale through the proper channels, escrow, title, etc.

4) If they are going to assume (or pay your mortgage), make sure you notify the lender and that the lender approves and puts them on the loan instead of you.  Otherwise, there goes your credit!

5) Be sure you have the willingness to start foreclosure proceedings when they miss two payments.

If you can’t be bothered with all the right details – and can’t harden your heart? Help them arrange for financing and get your money – and run. You are not equipped to carry a loan.

True, this doesn’t happen often.
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But when two different people in two different parts of the country bring this to me on the same day…it makes you take notice.
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And remember, you can find answers to all kinds of questions about selling on installment, repossessions and other tax and business issues, free. Where? Where else? At www.TaxMama.com.

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