Seller Carryback Financing

Seller carryback financing is using owner financing to sell a property.  This type of financing can be used along with a bank loan or other type of loan, but we are mainly referring to stand-alone seller carryback financing in this article.  Owner financing can be used to sell almost anything – real estate, cars, boats, etc.  In the real estate category, seller carryback financing or selling a note owner financing can be used with various property types like houses, condos, commercial buildings, mobile homes, and vacant land.  In the commercial world, seller carryback financing is often used for sales of businesses too.

Why Use Seller Carryback Financing For Real Estate?

There are many reason to carry a note (use owner financing).  These include:

• Makes the process quicker and cheaper
• Allows the parties to avoid using banks
• Allow a transaction to close when payer credit or property characteristics could have prevented that using traditional financing
• May allow the seller of the property to defer taxes on gains
• Lets the seller make additional money beyond just the difference between the original cost and the sales price of the property

Although it is always advisable to use an attorney and title company for drafting the documents and closing the transaction, most of the negotiating and legwork is between the property seller and the property buyer.  Once everything is signed and the transaction closes, the buyer makes payments directly to the seller or their designate.  Of course, the buyer is also responsible for paying property taxes, keeping insurance current, and maintaining the property.

Setting Up A Note

If this is the first time that you have created a note, you may be wondering what are the important characteristics of a strong note.  These items would also be important should you decide to later sell the note.  Here are things to consider before commencing with the documents:

• If possible, try to sell to a buyer who has good credit.  This generally means a credit score that is at least in the high 600’s.
• Collect as large of a down payment as the buyer can afford.  This means at least 10% for owner-occupied houses and more for other. types of property.  A large down payment by the buyer means that they have more “skin in the game,” and gives the seller more protective equity in case of a later default.
• As mentioned earlier, use an attorney or a title company to prepare all of the documents.  Although this will cost some money upfront, it can save thousands of dollars later.
• Where possible, apply an interest rate that is at least a point higher than comparable bank rates.
• Try not to have an amortization period of longer than twenty years.  If you must and if the Dodd Frank Act allows it, put in a balloon payment after 5-15 years.
• Be clear about whether the payer will be directly paying for property taxes and fire insurance or if you will need to set up an escrow account to collect those.
• Consider whether you want to use an outside servicing company to manage the note payments and ensure that taxes are current.  Using a servicing company can reduce the work of the note holder but the servicing companies will often charge $10-20 per month for doing it.

For more details, and to see a sample scenario of a good note, go here.

What To Do With A Note

Once all of the documents have been completed and you are receiving payments, you have a couple of choices to make.  First, you may decide to keep the note.  This could make sense if you don’t need a lump sum of cash now, and are comfortable with managing the incoming payments and being certain that taxes and insurance are current.  You will also need to understand that the note could default.

Another option is to consider selling all or some of the note payments to get a large sum of money now.  This relieves you of having to worry about the late payments, damage to the property, lapsed insurance, or delinquent property taxes.  The note buyer would handle all of these issues.

You may decide to sell the full note (all of the remaining payments) or only part of the note.  When you sell the full note, you receive a larger amount of money upfront and are done with the note once it has been assigned.  For instance, you might sell all 180 remaining payments and receive $100,000 from the note buyer.

Alternatively, you might decide to only sell part of the note.  Using the same example, you sell 90 payments for $60,000.  This allows you to keep part of the note, and may allow you to defer some taxes.  At the end of the 90 payments, you can either sell the rest of the note or take back the note and begin receiving ongoing payments again.

Process For Selling A Note

Whether you decide to sell the full note or just some of the payments, the process is basically the same.  Once you and the buyer of the mortgage note have agreed on a price, the following are the normal steps:

1. You will be asked to sign an agreement showing the price agreed upon and any condition.
2. You will be asked to submit any needed documents like a copy of the closing statement, proof of payments, and contact information for the property seller and buyer.
3. The note buying company will review the documents and order a drive-by appraisal.  This takes 1-2 weeks.
4. Once the appraisal is in and approved, the note buyer will order a title commitment.  This step also takes a week or two.
5. When the title commitment is received and approved, the buyer of the note will need 2-5 days to prepare the assignment documents.
6. You, as the note seller, will either receive the document through the overnight mail or will go to a title company to sign the documents.
7. You will have the funds wired to your bank account.  From start to finish, the process usually takes 4-5 weeks.

You may have questions about your particular circumstances and your note.  Alan is always happy to answer your questions.  Feel free to use the contact form or call 858-208-7776.