All Cash Offers May Be Questionable In Real Estate Transactions (Part 2)

1. Buyer goes into bankruptcy. You raise the question of the possible bankruptcy of the purchaser. If the proper protections are taken at the time of settlement, the filing of bankruptcy will create a delay, but should not pose a major problem for you. If you take back a first deed of trust from your buyer for the amount of the equity you are lending, and if this deed of trust (mortgage) is properly recorded in the land records where your property is located, you will be a secured creditor. In the worst case, you will ultimately get the house back.

But, if you already have a first mortgage on the property, and your buyer does not pay that off in full, you will only be able to obtain a second trust from your buyer. In this second-place position, you will be at greater risk. If the buyer does not pay you, I suspect the buyer will also not pay the first trust lender. The first trust lender can foreclose on the property and your second deed of trust may be wiped out.