5 Seller Concerns When Using a Bond for Deed
1. Purchaser Defaults – Two months of mortgage payments needed to bring current
The seller must also be aware that if the purchaser defaults on their obligations under the BFD contract, they will need to come up with approximately two months of mortgage payments in order to bring their mortgage current. It is best to bring a payment before the first of the month so that the payments are not late. The purchaser has forty-five days after default to bring the payments up to date, and those two months of missed payments will have to be paid by the seller if the purchaser cannot cure the default. Generally the seller in a BFD purchase receives a cash payment for their equity at the closing, and their real estate agent may recommend that they make sure to save a portion of these sums in case of a problem or deposit sums with the escrow agent to be used to keep a mortgage current in case of default.
2. Large cash payments at closing may require reimbursement
In a situation where a buyer defaults after placing a large cash payment at the closing, it is possible that the seller may have to reimburse the purchaser some of that money. It is considered against public policy to allow one party to a contract to be unjustly enriched in this manner. The actual amount would, of course, be reduced by costs associated with the sale and loss of opportunity to sell the property, so it would have to be a large cash sum to require any sort of reimbursement. There is also a recent bankruptcy case where the Trustee went after the seller to get a portion of the down payment back.
3. Possibility for vandalism
It is possible that a buyer who was about to default on their BFD contract would damage or vandalize the property before they were evicted. In our experience, this is an extremely rare occurrence. Sometimes the purchaser has in fact improved the property. This is also an issue for anyone who rents property and is something the real estate agent should keep in mind.
4. Biggest hazard for sellers: not being paid on time
The biggest potential hazard to the seller is that the purchaser may not make their payments on time, and this may affect the seller’s credit rating. The sellers can, of course, make the payment themselves in order to prevent it from becoming late. The sellers may use part of the down payment to maintain an extra payment in escrow. We recommend that the Seller include a balloon payment term in the BFD contract so that they can limit their potential liability for this type of problem. Note that the escrow company should notify the seller immediately if a payment has not been received. We at mail a default notice to both the purchaser and seller via certified mail.
5. Mortgage debt remains in seller’s name
A seller in a BFD must be aware that the existing mortgage is a debt that is in their name. If they wish to apply for a loan, they need to be aware that the existing loan may prevent them from borrowing any new funds. And as was mentioned above, if the buyer is not making payments on time, this may affect the seller’s credit rating. In practice, it is normally the case that a mortgage company will give the seller credit as income the payments on the BFD, and it generally varies between 80% to 100%.
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