Seller-financing Nightmare

Buyers' payments yo-yo out of control after falling on hard times

By Ilyce R. Glink

 Q: Back in 2003, my husband and I put $5,000 down on a house. We bought it for $65,000, and the owner set up an owner-financed mortgage for $60,000.

We made all of our payments on time in 2003, 2004 and 2005. But last year, our payments got a little off schedule. Then this year, in 2007, I bounced a check and we got behind.

The owner came to my house, and very rudely told me that we had to pay $200 per week, or $800 per month. I did it for a month. Then, I made nine more payments of $200, a payment of $185, two payments of $150, and a payment of $185.

Our regular payments were just $450 per month, so going then, to $800 per month was really tough for us. We then had another meeting with our seller who told us that even though we were caught up, he wanted us to keep paying that much each month.

We told him we couldn't afford it, so we settled on $500 per month. I said I'd still pay weekly, but then I missed a few weeks, although I made sure the $500 was getting paid within that month.

The seller got mad, and said paying once a month is not good enough. He told us that the interest rate on our loan is 8 percent, and the interest on our loan is $13 per day.

Now he wants us to pay $700 per month. I don't understand how he can do this. He owns a real estate company and is very wealthy. We heard he messed up two other families who live near us, but we didn't listen to him.

Since we got behind in our payments, he said he wanted the property back. Does that mean he is not going by the land contract we signed? Does that mean we are renting now?

I don't understand what's going on anymore. We hate to say goodbye to the $5,000 we put down, but we can't keep letting him raise our payments.

A: If I understand you correctly, your seller seems to be taking advantage of you. There are some important questions you need to answer: Did you rent the property or buy it? And, is your credit good enough to refinance with a conventional lender? If your seller is a very wealthy real estate investor, he probably has some expert firepower backing him up, such as an accountant or an attorney.

While you don't have much money, you need to hire a competent real estate attorney who can review your document and figure out if you even own this property. I can tell from your letter that your grasp of what you paid and what you still owe is rather loose. How much of each payments is interest and how much pays down the principal? Did the seller give you an amortization schedule showing you how quickly you'd pay down the loan? And, what interest rate was the loan set at?

Just so you understand, if you got a $60,000 loan today at 8 percent, you'd pay only $440 per month for a 30-year amortization payment. It sounds as though you've been paying this off a lot faster. If you paid an extra $200 per month, you'd pay off the entire loan in 13 years.

So, yes, it does seem that your seller is taking advantage of you and you need to hire someone who can discuss the situation with him in terms he understands. You also need to find out how much he says you owe, and you need to look into obtaining conventional financing to close out your deal with your seller as quickly as possible -- and the financing should not be from your seller, but with a legitimate mortgage company.

Q: My aunt sold my brother and me her house for $1 some eight years ago. She is now moving out of state to a relative's house and we are planning to sell the house. Will we have to pay capital gain tax?

A: The short answer is: Yes. You will have to pay long-term capital gains tax on the difference between the purchase price and the sales price, minus the broker's commission, transfer stamps, advertising costs, any other costs of sale and the cost of capital improvements you've made to the home, such as a new roof or new furnace.

If your aunt had held onto the property, and lived in it for two of the past five years as her primary residence, she would have been able to keep up to $250,000 in profits tax-free. Since the property is essentially an investment property for you and your brother, you'll have to pay long-term capital gains tax of up to 15 percent plus state tax on the profits.

Please talk to an accountant or your tax preparer for more details.