Can the owner of real property who is owner financing use the real property as collateral on a loan without the buyer's knowledge?

Answer 1

No, This is not appropriate, ( See Below ). In this situation the seller has basically made promises which it would be impossible to keep. It is almost certain the owner did not disclose this encumbrance of an owner financed mortgage note to the company that issued him a loan in the form of a colaterlized note( See the definition of Fraud ). Had he done so, he likely would not have been approved for the loan without some sort of written agreement from the buyer. The Owner financier could have legally used the Mortgage Note as collateral rather than the encumbered real property.

You have several avenues of recourse at this time. you may choose to notify the Lender by certified mail that you have a mortgage on the property and are the current owner, you should also notify them in your letter that you do not consent to the lien. You may wish to sue the seller for removal of the encumbrance or for a refund and damages if you choose to declare the mortgage contract void. Most of these types of situation can be avoided by simply filing the owner financed note with your Local Municipality. This creates a record of ownership with your local authority and would likely prevent this situation from ever occurring.

Financial institutions do a property records search prior to loan approval and they would have discovered your ownership interest in the property. Once you entered onto the purchase contract, "YOU" are the buyer of the property, "You" are actually the "Owner", The seller takes a position as the Lien holder on the property and is no longer the owner so long as you are not in default on your mortgage note. If you default on your note then the lienholder can forclose and retake posession of the property, only then would he again be the owner of the property with rights to place encumbrances.

Answer I know state laws vary. Under Oklahoma Law, the answer is No. The seller cannot legally sell the property without a "marketible title." I would look into what is known as "substantial misrepresentation." This should make your contract voidable removing any liability on your part.

Take a look at these definitions, Real Property Sales Contract: agreement to convey title to real property upon satisfaction of specified conditions. (It does not seem those conditions were met.) Rescission of Contract: The abrogation or annulling of contract; the revocation of repealing of contract by mutual consent by parties to the contract, OR -Cause by either party to the contract.

Answer 2

Clarification: When real property is sold the sale is accomplished by a deed. The deed must be recorded in the land records to notify the world that there is a new owner. Owner financed generally means the seller took back a mortgage and the deed and mortgage are recorded in the land records. Once that is done the former owner could not obtain a mortgage on the property. The lender would find the evidence in the land records that he no longer owns the land.

On the other hand you may be referring to an unorthodox arrangement whereby the owner agrees to sell the property and works out a schedule of payments by the proposed buyer. The deed isn't delivered to the buyer until the purchase price has been paid in full then the deed of sale is recorded in the land records. In that case where there is no record of the sale until the purchase price is paid off, the record owner could obtain a mortgage on the property without the buyer's knowledge.