The Legal Rights of an Owner in Owner Financed Defaults

When you owner-finance property and the buyer defaults on it, your rights vary based on the type of arrangement that you've set up with the buyer and based on your state's laws. Generally, you can't just throw the buyer out when he defaults, though. The key to understanding your rights is to review your owner finance agreement and familiarize yourself with your state's laws. While there are some general principles, every owner financing situation has the potential to be different.

A lease option or rent-to-own agreement is different from other arrangements because it's a lease agreement rather than a real estate purchase agreement. When the occupant stops paying you, you can file an eviction to have him removed from the property for not paying. Many rent-to-own agreements also let you keep any extra money that an evicted occupant has paid toward his option to buy your home. Before keeping the money, review your agreement to be sure that you can.

Whether you call it an installment sale, a land contract, or a contract for deed, any arrangement where you hold on to the legal title to the property while the occupant holds the equitable title and makes payments to you falls somewhere between a lease and a mortgage. Different states have very different laws on how you deal with these agreements. Some will require you to formally foreclose on the occupant of your property. Others let you take the property back after giving the occupant a chance to cure the default, as long as you've written the right to do this into the agreement. Talking to an attorney is usually the best course of action if a buyer on a contract defaults.

When you carry back a mortgage and you give the buyer the legal title to the property, he gets all of the same protections that he'd get if he went to a bank and got a loan. To get the property back from him you'll need to go through a formal foreclosure procedure, which may also include a redemption period. Furthermore, once the foreclosure ends, the buyer becomes a non-paying tenant and can force you to evict him.

Regardless of what your rights might be under your contract with your buyer and under your state's laws, going through a protracted and adversarial process might not be in your interest. The longer the buyer sits in your home, angry at you, the greater the opportunity he has to not maintain it or to vandalize it. Given these risks, it's usually in your interest to work something out to either get a bad buyer out of the property before it befalls harm, or to help a good buyer get back on track. Whatever you work out, put it in writing and consider having an attorney review it for legality.