Weighing Options for Seller with Carryback Loan on Land
Question: In one of your columns a buyer had purchased forty acres of land in northern Arizona (“Forty Acres”) with financing for the purchase of this Forty Acres by a seller-carryback $200,000 five-year mortgage loan. After five years, however, there had been none of the anticipated development in the area, and the Forty Acres was only worth $100,000. In your column you said that the seller could choose not to foreclose on the Forty Acres, but could file a lawsuit against the buyer for the failure to pay the $200,000 promissory note. In my opinion, however, after the seller sues on the $200,000 promissory note and gets a $200,000 judgment, the seller still has to collect on the $200,000 judgment. What if the buyer has no assets, moves out of state, or files bankruptcy? Wouldn’t it be better for the seller to foreclose on the $200,000 loan, and bid the $100,000 as the value of the Forty Acres, and if there are no other bidders at the foreclosure sale, become the owner of the Forty Acres? The seller could then file a lawsuit for the deficiency of $100,000 still owed by the buyer. Isn’t it better to have a “bird in the hand” with the ownership of the Forty Acres, and then file a lawsuit for the remaining $100,000 owed by the buyer?
Answer: Good comments. If there is a failure by a buyer to pay a land mortgage loan, the seller carryback lender (or any other mortgage lender) has the right either (1) to file a lawsuit and get a judgment for the full amount of the promissory note, or (2) do a foreclosure sale of the land and sue for any deficiency still owed on the promissory note after the foreclosure sale. In the deficiency lawsuit to get a judgment against the buyer, the amount of the deficiency could be a “battle of the appraisers.” For example, the seller’s appraiser could testify that the land was only worth $100,000 (and another $100,000 is the deficiency still owed on the $200,000 promissory note to the seller). The buyer’s appraiser could testify that the land was worth $200,000 and that the buyer owes nothing because there is no deficiency still owed on the $200,000 promissory note.