In today’s real estate climate, we, as closing attorneys field multiple calls a week from real estate agents and sellers asking us if we think selling a home to a buyer and financing that transaction is a good idea. Seller financing usually occurs when a buyer cannot get financing from a lender (Red Flag Number 1). Most likely, that buyer will tell the seller that they have just changed jobs or is self employed and all of the lenders that they have spoken to “need this or that” and they just cannot procure financing at this time. Forget about whether we feel the buyer is qualified as someone you should be lending money too in order to purchase your home. You as the seller and the lender need to be aware of a controversial North Carolina law: The anti-deficiency law as it pertains to seller financing.
While most at some point have heard someone you know say “North Carolina is an anti-deficiency state”, that person would be dead wrong. Most likely that conversation is taking place because someone you know is struggling to pay their monthly mortgage payments and they want to know whether, if they are foreclosed on, their lender sue them for the deficiency that results from taking the amount of money owed on the loan and subtracting the amount of money the lender receives from the foreclosure sale of the home. The answer to that questions is a definite “Yes they Can!”. North Carolina is in fact not an anti-deficiency state, like California, for example. But here is where the law gets tricky.
The laws of North Carolina allow banks to seek deficiencies from their borrowers but those same laws DO NOT allow you, as the seller financing the sale of your home, to sue the borrower for any deficiency in what they owe should you have to foreclose your mortgage or deed of trust. Therefore, we make it clear to our clients that should they allow their buyer to buy their home with seller financing, the only recourse they will have against that buyer, if that buyer defaults on paying back the loan, is the return of their home through the foreclosure process. I have had plenty of clients come to me looking to sue their buyers because those buyers could not pay back the loan that the seller provided when they sold their home. The problem arises when those sellers sold their homes five to six years ago at a value much higher than their homes are worth today. As an example, Seller A sells his home for $300,000.00 in 2005 to Buyer B who finances the whole purchase price with seller financing. Buyer B makes five years worth of payments and then defaults. Now the only recourse that Seller A has is to foreclose on a property that is now only worth $200,000.00. On top of the loss in value that Seller A is taking, they are also on the hook for paying the foreclosing attorney’s fees.
So BEWARE SELLERS – as a lender your rights are severely limited!
If you have additional questions, please contact one of our real estate attorneys.