Seller carryback financing is when the seller of a given property acts as a lender for a buyer on the seller’s property. The end result is that the buyer signs a promissory note to the seller, for the amount of the carryback with a set interest rate, set monthly payments, and a set time for when the loan is to be paid off. The promissory note is typically secured by a trust deed recorded on the seller’s home, preferably in a first secured position, but frequently in a junior position to some other lender’s secured loan on the seller’s property.
A seller carryback is a means of getting a parcel sold particularly if a conventional bank will not offer the full amount that the buyer needs to close the sale.
Even though a properly-drafted seller carryback will provide a monthly income stream for the seller of a given property, the seller carryback does have inherent risks that a real estate licensee needs to advise his or her seller of in writing before close of escrow.
And Seller Carryback Loans can frequently involve scams: read about two of the latest seller carryback loan fraud alerts
Seller carry back loans, also known as owner financing or seller financing are becoming an increasingly popular method for financing real estate purchases. As a buyer or seller, it’s important to understand what seller carry back loans are, how they work, and the pros and cons before entering into this type of arrangement.
What is a Seller Carry Back Loan?
A seller carry back loan is when the seller of a property provides financing directly to the buyer instead of the buyer obtaining a traditional mortgage from a bank or lender. The seller carries or holds the loan and collects payments from the buyer over an agreed upon timeframe.
Essentially, the seller acts as the bank for the buyer. The seller still transfers ownership and title for the property to the buyer. The buyer will make down payment to the seller and sign a promissory note agreeing to make monthly installments to pay off the remaining balance owed to the seller over time.
How Do Seller Carry Back Loans Work?
Here is a quick rundown of how a basic seller carry back loan transaction works:
- Buyer and seller agree to sale price for the property
- Buyer makes a down payment to seller, often 10-20% of sale price
- Seller carries a loan for the remaining balance, to be paid off over time
- Buyer signs a promissory note and deeds of trust securing the loan with the property
- Buyer makes monthly installment payments including interest to seller
- Loan payments go directly to the seller instead of a traditional lender
- Buyer pays off loan in full after agreed upon timeframe
Seller carry back loans remove the traditional lender from the equation. The seller is taking on the role of the bank and agreeing to finance the property for the buyer. All negotiations are directly between the buyer and seller.
Seller Carry Back Loan Terms
Seller carry back loans allow for great flexibility in structuring the financing terms between the buyer and seller. Here are some common terms that are negotiated:
Down Payment – Usually 10-20% of the purchase price The higher the down payment, the lower risk for the seller
Interest Rate – Typically higher than traditional lender rates Often 8-12% based on buyer’s credit.
Length/Term – Repayment timeframe, often 5-30 years. Shorter term = faster payoff.
Payment Amount – Monthly installment paid to seller including interest.
Balloon Payment – Larger lump sum payment due at end of term to pay off remainder.
Collateral – The property is used as collateral. If buyer defaults, property goes back to seller.
Pros for Sellers
There are some great benefits for sellers who offer carry back financing:
- Receive steady income from monthly payments
- Interest rates often 8-12%, better returns than other options
- Keep an ongoing interest in the property
- Avoid capital gains taxes by spreading out payment over time
- May increase sales price of property
- Buyers who don’t qualify for traditional financing may still buy
Cons for Sellers
Some drawbacks sellers should be aware of:
- Increased default risk depending on buyer qualifications
- Lose quick access to sale proceeds in lump sum
- No bank underwriting of buyer – need to self-qualify
- Pay taxes on payments received as income
Pros for Buyers
Buyers can also benefit from seller financing:
- Easier to qualify without traditional mortgage
- Negotiate better terms than with bank
- Lower down payments may be accepted
- Faster closing without extended mortgage approval
Cons for Buyers
Some negatives buyers should keep in mind:
- Higher interest rate than traditional lender
- Balloon payment may need to be refinanced at end
- No home appraisal or guarantees like with bank loans
- Increased approval scrutiny by individual sellers
Is a Seller Carry Back Loan Right for You?
Seller carry back loans offer great flexibility but also come with increased risk over traditional financing. As a seller, you take on all risk of the buyer defaulting. And as a buyer, you lose many of the consumer protections offered by banks.
That said, in the right situation with a thorough screening and approval process, seller financing can benefit both the buyer and seller. If you are able to negotiate fair terms, a seller carry back loan can provide an alternative method to finance real estate and potentially help get a property sold or purchased.
As with any big financial decision, be sure to consult professionals like legal counsel and tax advisors to fully understand the implications before entering into a seller carry back loan arrangement. With proper diligence by both parties, seller carry back financing can be a win-win situation.
Risks of a Seller Carryback to the Listing Agent/Broker
Seller carryback loans are a big risk particularly for the listing agent/broker. There have been situations where the seller is in a second secured position on a $100,000 or more carryback, and the seller cannot keep the first secured lender on the parcel current when the buyer-owner defaults. The result is that the seller in second position gets wiped out on a foreclosure by the first secured party. The seller then looks to get reimbursed because his or her real estate agent did not advise him or her in writing about the inherent risks of a seller carryback, particularly in a junior position. As a result, the listing agent gets sued for negligence or, worse, for breach of a fiduciary duty due to failing to properly advise on a seller carryback. Damages would be loss of the principal amount of the carryback, prejudgment interest, and assorted costs incurred in protecting the security under the second trust deed.
Risks of a Seller Carryback Loan for the Seller
As in any sale and purchase of real property, there are inherent risks of potential litigation. None are more so in a seller carryback loan. The risks to the seller are exacerbated if the seller is not in a first secured position on the carryback. In this case, in order to protect his or her junior secured position, the seller most likely will have to keep current all defaulted senior secured loans or face the possibility of being wiped out in a foreclosure proceeding. If the property forecloses, the seller will have no recourse against the new buyer for the carryback loan fulfillment as a matter of law, and will lose what is owed under the seller carryback.
The greatest concern in the seller carryback loan is a default by the borrower buyer. Should a buyer in a seller carryback transaction default on the loan, the seller is forced to foreclose on the security if the buyer will not voluntarily cure the default. If the seller forecloses on the security and ends up with legal title to the secured property, evicting the buyer post foreclosure can be both expensive and time consuming.
Another potential seller carryback risk is if the buyer-owner makes alterations to the sold property after the purchase is final, and foreclosure happens prior to the repairs being completed. If the seller with the carryback loan takes back legal title, he will have repairs to complete that were not anticipated when the trust deed securing the buyer’s promissory note to the seller was recorded. Repair costs could be in the tens of thousands of dollars, and may need to be completed prior to attempting to resell the property, to recover the value of the seller carryback in addition to the payoff value of a potential first secured position loan.
There is also a significant seller carryback risk when the loan payoff in full is due. The buyer may make nondisclosure claims against the seller for the first time as a means to renegotiate the terms of the secured promissory note. These claims can center around undisclosed water intrusion issues, undisclosed foundation issues, and similar issues, where the buyer contends that such information was known by the seller well before close, and was material to the price and desirability of the property.
What are the Risks of a Seller Carryback Loan?
FAQ
What is a seller carry back loan?
What are the risks of seller carryback?
What does it mean when a seller takes back a mortgage?
What does it mean if the seller carries the note?
What is a seller carryback loan?
Seller carryback loans, also known as seller financing, are an agreement between a seller and a buyer where the seller extends credit to the buyer instead of a bank or other financial institution. The buyer signs a promissory note with the seller.
How does seller carryback financing work?
Seller carryback is a way to finance a home purchase where the seller extends credit to the buyer instead of a bank or other financial institution. The buyer signs a promissory note with the seller, makes a down payment, and pays installments toward the purchase price over time.
What is a seller carryback?
A seller carryback is a financing arrangement where the seller becomes the lender and carries back a portion of the sale price for the buyer. The structure can vary, but typically, the buyer gets an 80% first mortgage with a large bank or mortgage lender, puts 10% down, and carries back the remaining 10% with the seller. In some cases, the seller carryback may only be 5% or up to 20% of the asking price.
What is carryback financing?
Carryback financing occurs when a real estate seller provides financing for the property buyer. It’s also known as “seller financing,” and it can violate the contract you have with a traditional lender. Put simply, a seller agrees to carryback a note and deed of trust, usually in the form of a second mortgage.