Legal Question in Real Estate Law in California

We have been asked by well qualified buyers to take a contract of sale on our house. The buyers are willing to put 25 to 39 percent down, and we would carry the rest in a contract at 6% for six years, with a balloon payment at the end.

Our question is not about what happens in case of default. Rather our concern is if by taking a contract, we are more liable in the event that the buyers have second thoughts, or find something wrong with the house, and stop payment. Are we more liable by taking the contract ourselves, as opposed to the buyer getting conventional financing on a first and taking us a second?

The interest income is welcomed, but we worry about additional risk of not being at arms length with the buyer. These seem to be high end, qualified buyers. He is the head of the planning commission of a large CA city. Thanks

Asked on 7/23/13, 9:16 am

2 Answers from Attorneys

Anthony Roach Law Office of Anthony A. Roach

First of all, I suggest you never sell your property with the balance to be paid by a promissory note that is unsecured. You do not mention security at all, and state that you do not care what happens in case of default, but if you are unsecured and they default, you will be forced to have to file a lawsuit, and they can subsequently sell the house while that lawsuit is pending and disappear. Only a fool would loan money on real property without security.

Second of all, if you do carry the balance of the purchase price secured by a deed of trust, you should be aware that the arrangement will fall within the ambit of the purchase money anti-deficiency protection of Code of Civil Procedure section 580b. This means that in the event of default and foreclosure, you will be limited to the property and whatever it sells for then, regardless of the manner of foreclosure that you choose. In other words, you will bear the risk of loss if the market value plummets, not the buyer.

There is nothing in the fact of seller carry back financing that makes you more liable that would distinguish it from third party financing. Your liabilities, and your duty to disclose are the same.

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Answered on 7/23/13, 9:42 am

Timothy McCormick Libris Solutions - Dispute Resolution Services

I disagree in part with Mr. Roach. He is correct that you do not have any more or less liability regarding the sale of the property by carrying-back the purchase money loan. You do, however, create a whole other set of legal rights and obligations as a lender that could potentially lead to liability if not handled correctly. It also creates a more complicated tax situation on your capital gains and the interest payment - not better or worse, just a layer of complexity to be dealt with. 6% is an attractive return in the current investment environment, and relatively low risk if you properly secure the debt. For that reason, combined with the stratospheric commissions on the high property values in the Bay Area, I am seeing a lot more of these private sales. In fact I have three I am handling in my San Jose office right now, and completed two others in the last three months. And, yes, that is a polite way of saying that this is not something to do without a lawyer, when you are doing it without a real estate agent and loan broker. It will still cost FAR less than the commissions to those professionals, which would mostly not be earned when you have brokered the transaction yourself, and will be money well spent given the consequences of a botched transaction.

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Answered on 7/23/13, 10:52 am

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