A big real estate contract carry back quandary.

We had a rental house with a nice big shop with a lift that we rented to our friends. The house to our friends with kids who didn't care about the shop & another friend who just rents the shop for hobby/weekend projects. My shop friend also helped me a lot with my projects since we lived next door in our other house but not shop just a garage. 
We sold our main house & moved to Florida. Then we decided to sell the other house because the hurricane damaged house needed more $ to fix than expected. It took a few months to find an investor that would allow our friends to keep renting. We carried the loan- 6.5% with 25% down,  balloon due in 5 years. Everyone signed a 3 year lease, so they have places for at least 3 years which is important because rents have gone crazy as we all know. 
Fast forward 1 1/2 years. The buyer has been late with our payment a couple of times. In the promissory note it states that upon being late, we can call the loan. This sounds fine but if we do, I know the buyer will probably sell it which means all of our friends are booted. There is a chance they could pay the loan balance but it's a lot. It would be great if we call the loan & then foreclose but it's appreciated a lot & would be easy for them to sell before we can reposes it. My wife is all about calling the loan but I just don't want all of our friends to be looking for housing & a shop suddenly in this market. 

I probably don't have enough information to make a real suggestion, but your best bet for a happy outcome for all involved is to just talk to the buyer and explain your concerns. In this market, odds are good they'd be able to refinance in about 5 minutes at a lower rate. That would put the money in your pocket and make their payment/non-payment habits not your problem.

My 2 cents.  Talk to the borrower and see if they are in any position to refi right now.  It will save everybody a lot of grief.  It sounds like they may have a better equity position now. The only issues will be credit score or if the lending ratios  will work for their income level.

If they can't, maybe you can offer up a modification of the agreement that gives you a higher interest rate or add a default interest rate at whatever your state will allow.  Another option is to offer to cash them out and give them some of their down payment back to walk away. If you can work a modification get an assignment of rents clause in there. That way your friends  will be paying you directly if things go sideways in the future.

As soon as you file anything on your loan the value is going to take a hit.  How much value has been gained over the last 18 months? Most of it will disappear for the borrower when the clerk's office gets involved.

The buyer can't refinance. He is a college student. His dad actually financed the deal & is a wealthy investor. He is using this deal to train his son how to do it. 
Plus it is a very old house built in 1942 & added onto a few times. It is a great rental   but no chance of a conventional loan & no chance of FHA because it's a rental. 
My friend who is a RE agent is sure it's up $80k because so many blue staters moving in.

In reply to mdshaw :

Wait a minute... who financed the deal?  The buyer's father, or you?

In reply to mdshaw :

The only thing the father is teaching the son is how to fail. 
 

He's overextended, paying much too high interest, has structured a deal he can't tap into his equity, and has inherited some oddball tenants. 
 

What's Dad trying to teach him?

It sounds to me like you've gotten into a deal that has a lot of potential to go sour. Is the dad a proponent of nothing down deals?

You've seen the chinks in the facade on this deal. Call your attorney and start finding out what the process is to call the loan. If there is a basis for it, begin the proceedings. 
 

I respect your feelings about your friends, but they are really not your responsibility. Let them be grown ups and make their own decisions. 

...plus, it's likely their 3 year leases still need to be honored by the owner (and probably anyone he sells to). 

The rent pays for everything. The son just gets sloppy on paying us. The house rents for $1,000, the shop for $600. Pretty automatic until the balloon is due.

The father paid the $50k down.

It was great for us & that's the appeal of owner financing, the possibility of getting it back.

In reply to mdshaw :

Don't get your hopes up. Unless he's a complete idiot, you aren't getting the house back. 
 

At best, you are starting a long drawn out legal process that can be ended at any moment when the kid pays (or Dad pays to protect his interest). 
 

You're not getting the house back, but you still need to begin the process to protect your interest. 

Is your lien on the property a first mortgage, or a second mortgage?

If Daddy's a savvy investor, then I doubt he gave Jr a gift of $50K. More likely he put a lien on the property for it. 
 

If he has a first mortgage and Jr defaults on your lien, he'll fire sale the house, get his $50K back, and you will get burned for any shortfall in paying back the liens. 

This is completely speculative of course.  There are way too many gaps in this story for anyone to be an armchair legal consultant.  That's why you need to call your lawyer.

I don't see anything automatic in the payments if the son was able to choose to be "sloppy" and pay you late. Sounds like a completely manual process that starts with rent checks that are payable to the son, not you. 

As mentioned above, your loan position is a major factor.  It sounds to me like you need to be talking to daddy/wealthy investor. He will want to keep the kid out of the foreclosure process if he is trying to teach him how to invest in real estate.  A recent foreclosure filing is not a great way to finish college and expand your horizons in the market.

Let dad have the 'Come to Jesus' meeting with him first.

I mean he doesn't have to work to make the payment. The payment is covered by the rents.
There is no 2nd mortgage. The father gave him the $50k to pay us the down payment.  I'm sure dad will get it back upon resell in the future or another deal. 

In reply to mdshaw :

Are you sure?  Have you checked with the registrar of deeds?  You really don't know that unless you've done a recent title search. 
 

It doesn't matter. If yours is the only lien, that's good. 
 

But there is still NO prospect of you getting the house back. No court would award you the house with $80K in equity PLUS the $50K in down payment you already have just because the kid was late with 2 mortgage checks. 
 

If the kid were to lose the house, Dad's $50K would be gone. He's NOT gonna let that happen to a property with $80K in equity. He'd buy it himself first. 
 

The appeal of taking back a mortgage has nothing to do with the potential to get the house back. It has to do with earning interest, facilitating a sale, and structuring payments over time for a revenue stream, tax purposes, or other. 
 

Foreclosing on a house is NOT an opportunity. It's a big nightmare. 

Everything about this deal sounds like an episode of Judge Judy.

This sounds messy. 
 

I'll just say this: your friends who are renting from the new owner are none of your concern in this matter any more. Do not hesitate to take legal action because of them. 

I guess I place old friendships to a higher value. We are protected all the way around.
Call the loan - we get $164,000 

Not expecting to get the house back, that wasn't the main topic, just an added bonus if happened,  but dad would surely step in to the rescue.

We've just done well in life from working hard & like to help others, especially friends. 

In reply to mdshaw :

Nothing wrong with that!

But you've already done that... you structured your sale to protect them, and they have 3 year leases. 
 

Now the guy you are helping is the delinquent buyer.

If there is a father bank rolling this whole thing, have you approached the father about late payments?  

I don't mean to be blunt but if the father is savvy at real estate, are you the one getting played here?  What I hear is kid is bringing in rent income every month and not having to put out payments to you.  Since you are not a bank, these late payments cause the kid no grief in credit score dings.  After some months of this (maybe a year of this) the kid will have some coin pocketed from the rent and then he sells the place to the father or another buyer.  

The father may have put the kid into this equation as a way to pull in some nice "profits" before he has to really pay for it.  When the father does "pay for it", he'll finance a huge chunk of it given the new found property value increase.  

Dad paid $50k for a place that is clearing him probably $1,500 every month (if he doesn't pay you) and when it is said and done he will sell the place for $80k more than he paid.  $30k profit as well as $1,500 every month he can not pay you.  

Do what your contract says you should do. 

He has paid the $1600 to the long term escrow company for a year & a half then they pay us. But a couple times he was late & said it was an "electronic" issue. He missed March until I called the escrow company & him this last Monday.  $ was in our account for March & April the next day. So currently he's on time.  I should just call it next time & see what happens. My wife is afraid I would spend $164,000 on cars though.

If that is the history I wouldn't jump to calling the loan with any kind of recorded paperwork.  Maybe have an attorney shoot him a letter that explains the E36 M3 stops now or he is risking having it called.

Any kind of late fee involved? If its that easy to get him caught up just enjoy the extra cash if so.

I will say that I have paid my car loan the on the 15th of every month, for the past two years. It is due on the 19th. I've never had an issue. The past two months I have received letters stating my payment was late. Called the loan holder, and they said it has been happening with regularity that people's payments are taking much longer than normal to get there and checks are taking much longer to clear, and they don't know why. 

I doubt this related to your late payments - this sounds like he's just not paying. In todays world of automated payments that you can do from your cell phone, there is no excuse for that. 

Late fees sound like a much more reasonable solution than calling the loan over a few mildly late (not missed) payments.

Yes he pays a $53 late fee.