Owner Financing Scam That Wipes Out Your Seller Carry Note
July 29th, 2010 categories: Seller Financing, Selling Your Note
The perfect set up:
- Seller owns $500,000 property free and clear (or only has a small loan)
- Buyer offers seller full asking price if they’ll accept $300,000 now and
- Carry a $200,000 note
I know… you’re thinking,
“So what’s the problem??? That’s a 60% down payment for cryin’ out loud!!! I’d take that in a heart beat! There’s $300,000 of protective equity on this deal! I HOPE they default so I can take the property back and sell it again for full value!”
Not so fast…
The $300,000 that the Seller received at close of escrow was a loan from the Buyer’s Private Money Buddy, and the seller carry back loan was in 2nd position.
THERE WAS NO DOWN PAYMENT!!!
Zip, zero, nada. No “skin in the game”. And there’s no problem if the buyer is 100% ethical and lives by the Golden Rule or the Golden Fleece or Fibonacci’s Golden Mean… but if the Buyer only lives for GOLD, here’s what they do…
They tell their Private Money Buddy,
“Hey Dude, I’m not going to pay you according to the terms of the note, so… you might as well foreclose on me, right?” (wink wink, nudge nudge)
The sellers/note holders (holding that 2nd lien note), if they’re not sophisticated and don’t take precise and definitive action, they’ll get wiped out at the Trustee Sale, and the Buyer and his Buddy get the property for a total investment of $300,000 plus foreclosure costs.
Sweet, huh? I thought you’d like it.
So how to avoid it:
- Use a professional note consultant to engineer your transaction (or an attorney or accountant or someone you trust who understands how real estate and notes work)
- Use a highly professional and diversified note servicing company… they’ll help you keep on top of things and advise you on how to proceed if anything goes wonky
- If you’re thinking of taking a 0% down deal from a buyer… have your head checked
Owner financing is an effective and powerful tool when used
- Legally
- Ethically and
- Intelligently
Wishing you the best!
Dawn
