Dumb question about carrying the second

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Ok - I just dont get it...If a seller carries the second, does that mean he is actually taking out a mortgage for like 20% so that you pay only 80? Or that he's cashing out 20% and giving it to you, or what?
Is it some other simple concept that I'm just missing?
What am I not getting here?

If a seller carries back a 20% 2nd then they have a lien on the property and you as the buyer will be making payments to them until it's paid off. The seller is agreeing to have you pay them in installments for 20% of their equity.

So how do hey get the 20% You just buy 80%, and they already have the equity? They're not actually owing 20% of the property to the bank, and paying right? I'd think that could cause a lot of problems.
Banks are cool with this arrangement?

Yes, say you are buying a home for $100K. The seller agrees to carry back 20% or $20K. You as the buyer get a loan from the bank at $80K and that's all the seller receives when you close.

Banks don't have a problem with this because they are only loaning at 80% LTV which gives them a stronger position than would a 95 or 100% LTV.

Minna the primarary lender must be advised of the second mortgage. They will run a tight appraisal on properties that have seller financing on a second because of mortgage fraud. They are being carefull that you are not buying an 80,000 property for 100,000 and having the seller carry back 20,000.
The idea behind doing that is that the buyer can get the property with a lower interst rate and no PMI. The seller after closing under this senario forgives the second mortgage after closing. This puts the lender in the spot of lending 100% of the value instead of the 80% that they thought.

If this is the plan becareful because it is mortgage fraud.

I see...so really this would help someone who was either cash or credit deficient to get the 100k loan himself, right?
So for a buyer who has credit and cash, there's really no place for seller carry backs then right, unless you're totally overextending yourslef?
Like say I had 20k, and wanted to purchase a 100k house- No need to have the seller carry anything. But if I wanted to buy a million dollar house, I could accomplish it by having the seller carry the second.
So thats the deal right?

As a seller carrying a second can make it easier to sell a house. The buyer doesn’t need as much cash. Using your 100k scenario:

Buyer pays 100k for house
Gets bank loan for 80% or 80k
Seller carries note for 20% or 20k
At closing seller receives 80K
Buyer makes monthly payments to bank on 80k mortgage
Buyer makes monthly payments to seller on 20k note

As a seller you can get your home sold quicker because you have a larger pool of buyers. You can now sell the house to people who have smaller down payments available. You can also command a higher price for the home in that some people will be willing to pay more for a home that has an easy finance option. As a rehabber you should learn about holding a note. If you have a rehab loan that is costing you a lot you may be better off taking some of your profit in the form of a note.

Example:
You purchase a home for 50k with a rehab loan.
Spend 10k in repairs
Sell home for 100k
Hold note for 20k
Buyer gets 80k loan
You get 80k at closing & hold 20k note
After paying back loan and repair cost you are left with 20k cash & 20k note

This can be a better option than sitting on a house for several months in order to get it sold and incurring more in carrying costs. The note that you hold can also be sold for cash if you need to but you would have to sell it at a discount.

8)

Originally posted by Jim Gordon:
Minna the primarary lender must be advised of the second mortgage. They will run a tight appraisal on properties that have seller financing on a second because of mortgage fraud. They are being carefull that you are not buying an 80,000 property for 100,000 and having the seller carry back 20,000.
The idea behind doing that is that the buyer can get the property with a lower interst rate and no PMI. The seller after closing under this senario forgives the second mortgage after closing. This puts the lender in the spot of lending 100% of the value instead of the 80% that they thought.

If this is the plan becareful because it is mortgage fraud.


If the lender knew what they were doing and hired a decent appraiser the silent second problem wouldn't exist. We see these all of the time in Austin. Hopefully this stuff isn't happening anymore since the brokers aren't allowed to talk to the appraiser. The trouble now is that appraisers are more loco than banks and are afraid of being tossed in jail so nobody can get loans even if the area supports a higher appraisal.

It is interesting to see an old thread like this to demonstrate the crapola that was going on several years back.

I am trying to understand this situation clearly!

If the seller carries back 20% of 100k
You then get a loan for 80k- my question here is? How do you structure your offer for this kind of transaction?

1. Is it going to be on your contract that the buyer is carrying back 20% for you? or are you going to write a seperate agreement with the seller?

2. The bank has to be aware that the seller is carry back the 20%. will they like a lien on a property they are going to finance?

3. For the loan of 80k, you now have to provide 20% for down payment $16k or will they consider the 20% that the seller is carrying?

l'll like someone that has use this strategy before to share their experience.

Thanks

Originally posted by Tracey Williams:
I am trying to understand this situation clearly!

If the seller carries back 20% of 100k
You then get a loan for 80k- my question here is? How do you structure your offer for this kind of transaction?

1. Is it going to be on your contract that the buyer is carrying back 20% for you? or are you going to write a seperate agreement with the seller?

The seller carryback deals I have done all had the entire agreement in one contract. I suppose you could have a 2nd contract if you wanted to for some reason, but there is no good reason to put it all in one contract.

Originally posted by Tracey Williams:

2. The bank has to be aware that the seller is carry back the 20%. will they like a lien on a property they are going to finance?

Yes...the bank will obviously want a lien to protect their security interest. The bank also has to allow the seller to suboridnate their interest when they create the 2nd for the transaction. At the closing the bank's lien will get recorded prior to the one from the seller.

Originally posted by Tracey Williams:

3. For the loan of 80k, you now have to provide 20% for down payment $16k or will they consider the 20% that the seller is carrying?

Generally the bank won't count the 20% the seller is carrying as a down payment. It really depends on the bank, their product, whether or not some GSE is going to buy the paper, etc. The short answer to this is that the bank will still generally want a down payment from the buyer. Some bank products will allow for "deferred maintenance credits" where you can chip away at the down payment required by the buyer.

Note that we are talking about residential deals here.

Hi Menna, actually, both of your methods can be accomplished, the seller can refi and under a contract carry back 20%. Or lend 20% of the equity which is established by the sale price. Let's just address the equity financing as the other is more complicated.

A bank will have the property appraised as stated above. The loan to value of your deal will be based on the appraised value or the sale pricce, which ever is LESS. If the sale price is higher than the appraised value, generally a lender will want you to make up that difference with your money. Just because seller financing is involved, they will want you to have real money in the deal, skin in the game. If a borrower has no real money in a deal, it's much easier for them to walk away and lose nothing, other than having a credit issue, say in a bankruptcy.

Let's say the bank agrees to loan 80%, most likely they will want 10% down from you that leaves 10% for the seller to cover.

The bank looks as to this loan as any other, first to your capacity to pay, not only the first mortgage but also the second mortgage that the seller makes. They also look to other issues. If your deal is for an investment, they will also look to your experience in doing such business, they are considering the total risk involved, if you lease a house and break laws, you could be sued and that would likely put their loan at risk, (simplified explanation of contingent liabilities and risks).

Going to clsoing the bank makes a first mortgage and is closed as any other loan. The seller is credited on the settlement statement toward the sale price in the amount of the loan he is carrying back or making. The seller receives a note made by the buyer. Real cash is not involved in the seller finance loan, it is an amount of equity that seller is entitled to based on that sale price. The closing agent has the documents filed after closing. FIrst mortgages are filed as a lien on the property first. The seller's note is filed after the first, thus it is a second lien, there is no subordination, it's in the order inwhich the liens are filed. You will have two seperate loans and you'll be required to make payments to both lenders. Now, let's say a year down the road, and this deal being an owner occupied purchase, you want to get another loan from your bank and use the property as collateral. It will be appraised again and if there is enough equity, they will make you the loan. The second mortgage holder, the seller, will have to subordinate his second to the bank for the new loan being made. Subordination is where an existing lien holder agrees to allow another lien holder to have a superior position in the order of the liens filed, so now the bank has a first, and after subordination, a second position with the new loan and the seller is now in third position.

As stated above, banks rely on the appraisal to establish their value of collateral. You can see now that if a seller agreed to "carry back" a sham loan so that the buyer could get a higher cash loan, that this would be fraud. To make seperate contracts, one for bank purposes and another with the seller is fraud and illegal under several laws. There is only one purchase contract on any deal, if anyone suggests otherwise, call the FBI!.

In your offer, you simply state the terms of your offer, most all standard sale contracts provide a line to be checked to request seller financing in the financing paragraph. The amounts requested can be anything from 100% financed by the seller (not likely accepted) to anything less with the balance due being made up from your down payment and obtaining other financing.

Hope this clease it up for you Menna, good luck, Bill

Just checked with my bank on this and they said since Fannie doesn't allow seller assistance, this won't work with large banks. But if there's a bank which keeps the loans in-house, then this is a viable option.

Originally posted by Max I:
Just checked with my bank on this and they said since Fannie doesn't allow seller assistance, this won't work with large banks.

The post that Bryan replied to was from 2007 – 3 years old. That resurrected an old thread.

Banking rules have changed significantly since then.

:cool:

I am a little confused....

If the seller has a 80% LTV in play buy it Sub 2... If they have less buy it Sub 2. with a larger seller carry. If they have 0 LTV then buy it with seller financing...

If they want some cash then borrow from a friendly lender and subordinate the seller second.

If you cant find a friendly lender and the seller has 0 LTV have them refi the thing and wrap or carry a second behind your sub 2...

As for terms in a deal here are mine..

Subject to and Owner Financing Purchase Price: $ ___________________.00
Buyer buying property Subject to the existing loans in the amounts not to exceed $_____________. 00 and Seller shall finance $______________. 00, at an interest rate of _______ percent. all due and payable in _____ years following the close of escrow date. The first payment shall be due _______ Days following close of escrow and shall continue every _____ month(s), amortized over _____ year(s) until paid in full and according the terms of this paragraphs. Balance to close, (U.S. Cash, certified or cashier's check) subject to adjustments and prorations: $___________.00. TOTAL $___________.00 Additional terms of the note are as follows;

(i) Borrower will pay a late charge of $15.00 for each and every payment received more than 30 days after it is due.

(ii)Privilege is reserved of prepaying the unpaid principal of this note in full or in part at any time without penalty.

(iii) This note is subject to Section 2966 of Civil Code, which provides that the holder of this Note shall give written notice to the Trustor, or his successor in interest, of prescribed information at least ninety (90) and not more than one hundred fifty (150) days before any balloon payment is due.

(iv) Privilege is reserved and Borrower may, at any time, substitute for the collateral that is security for this NOTE secured by a Deed of Trust. Said collateral shall be of equal or greater value. Value shall be determined by the Borrower. Seller shall execute all documents necessary to substitute collateral upon the request of the Borrower within seven calendar days of request to do so by the Borrower.

(v) Privilege is reserved and Borrower may skip one monthly payment for each twelve (12) month period. The mortgage shall be extended one month for each skipped payment.

(vi)The holder of this note and mortgage is limited to recovery of the debt evidenced hereby by foreclosure and sale of the property affected by the mortgage securing same. The makers/payors shall not be personally liable for any deficiency resulting from any sale and/or foreclosure hereunder.

(vii) If this note is prepaid prior to _______ day of ______________________________, 20_________, then mortgagor shall receive a discount of _______________________percent (______%) of the remaining balance due.

(viii) Privilege is reserved that Mortgagor shall have the right of first refusal to buy this mortgage under the same terms and conditions that mortgagee herein has agreed to sell this mortgage. Furthermore, this mortgage shall not be sold or assigned without the prior written agreement of the Borrower.

(ix) The subject mortgage is fully assumable upon sale, transfer, or conveyance of the subject property.

(x) The Deed of Trust securing this note shall be subordinate to a subordination agreement which will result in your security interest in the property becoming Subject to and of lower priority than the lien of some other or later security instrument. Subordination agreement shall be recorded and a pre recorded copy of that document is attached as exhibit B.

(xi) Each payment shall be credited first on interest then due and the remainder on principal, and interest shall thereupon cease upon the principal so credited. Should default be made in payment of any installment when due the whole sum of principal and interest shall become immediately due at the option of the holder of this note. Principal and interest payable in lawful money of the United States. If action be instituted on this note I promise to pay such sum as the Court may fix as attorney’s fees. This note is secured by a Deed of Trust to trustee of buyers choice.

Originally posted by Folu Ahmed:

What happen in the case of a multi-family unit? can seller carry back on commercial property as well?

Thanks


Yup...they can...my comments still apply for commercial loans. I read my last thread response and I think I added the distinction b/c some banks will consider the seller-carried equity in a "CLTV" calculation as a rider to their LTV underwriting. They will specify a max LTV AND CLTV for the deal. From the bank's perspective this is de facto equity and does not impair their tertiary source of repayment. I am not a lender so I have no idea how they underwrite the cash flow for the project with the 2nd from the seller, but I suspect it is still included in the 1.2ish DSCR calculations they use to underwrite the file.

"De facto equity" is a term that also gets tossed around in LBOs. Sellers are generally EXPECTED to carry a note as standard operating procedure for the sale. Commercial deals and borrowers are generally more sophisticated so I don't think banks worry about this as much....that, and the deals cash flow more (generally) b/c of the scale economies.

I feel like I am rambling....hopefully that helps to clarify. :mrgreen:

I think a lender expert can chime in here and educate us all some.

Originally posted by Michael Quarles:
I am a little confused....

If the seller has a 80% LTV in play buy it Sub 2... If they have less buy it Sub 2. with a larger seller carry. If they have 0 LTV then buy it with seller financing...

If they want some cash then borrow from a friendly lender and subordinate the seller second.

If you cant find a friendly lender and the seller has 0 LTV have them refi the thing and wrap or carry a second behind your sub 2...

As for terms in a deal here are mine..

Subject to and Owner Financing Purchase Price: $ ___________________.00
Buyer buying property Subject to the existing loans in the amounts not to exceed $_____________. 00 and Seller shall finance $______________. 00, at an interest rate of _______ percent. all due and payable in _____ years following the close of escrow date. The first payment shall be due _______ Days following close of escrow and shall continue every _____ month(s), amortized over _____ year(s) until paid in full and according the terms of this paragraphs. Balance to close, (U.S. Cash, certified or cashier's check) subject to adjustments and prorations: $___________.00. TOTAL $___________.00 Additional terms of the note are as follows;

(i) Borrower will pay a late charge of $15.00 for each and every payment received more than 30 days after it is due.

(ii)Privilege is reserved of prepaying the unpaid principal of this note in full or in part at any time without penalty.

(iii) This note is subject to Section 2966 of Civil Code, which provides that the holder of this Note shall give written notice to the Trustor, or his successor in interest, of prescribed information at least ninety (90) and not more than one hundred fifty (150) days before any balloon payment is due.

(iv) Privilege is reserved and Borrower may, at any time, substitute for the collateral that is security for this NOTE secured by a Deed of Trust. Said collateral shall be of equal or greater value. Value shall be determined by the Borrower. Seller shall execute all documents necessary to substitute collateral upon the request of the Borrower within seven calendar days of request to do so by the Borrower.

(v) Privilege is reserved and Borrower may skip one monthly payment for each twelve (12) month period. The mortgage shall be extended one month for each skipped payment.

(vi)The holder of this note and mortgage is limited to recovery of the debt evidenced hereby by foreclosure and sale of the property affected by the mortgage securing same. The makers/payors shall not be personally liable for any deficiency resulting from any sale and/or foreclosure hereunder.

(vii) If this note is prepaid prior to _______ day of ______________________________, 20_________, then mortgagor shall receive a discount of _______________________percent (______%) of the remaining balance due.

(viii) Privilege is reserved that Mortgagor shall have the right of first refusal to buy this mortgage under the same terms and conditions that mortgagee herein has agreed to sell this mortgage. Furthermore, this mortgage shall not be sold or assigned without the prior written agreement of the Borrower.

(ix) The subject mortgage is fully assumable upon sale, transfer, or conveyance of the subject property.

(x) The Deed of Trust securing this note shall be subordinate to a subordination agreement which will result in your security interest in the property becoming Subject to and of lower priority than the lien of some other or later security instrument. Subordination agreement shall be recorded and a pre recorded copy of that document is attached as exhibit B.

(xi) Each payment shall be credited first on interest then due and the remainder on principal, and interest shall thereupon cease upon the principal so credited. Should default be made in payment of any installment when due the whole sum of principal and interest shall become immediately due at the option of the holder of this note. Principal and interest payable in lawful money of the United States. If action be instituted on this note I promise to pay such sum as the Court may fix as attorney’s fees. This note is secured by a Deed of Trust to trustee of buyers choice.


LMAO. I'm really surprised you have not lost your license, if you still have one. So, you really think you can substitute a dog house for the one originally sold? This just plain smells of scamming a seller. I can imagine the kind of hype that has to be used to get a homeowner to agree to this stuff, I bet any judge can too. Michael, some of your stuff is really good, the marketing ideas, but this, I'm floored that you would suggest such a thing. It's obvious this was not written by an attorney, but getting one to say you could use it is a totally different thing, if anything were to blow up, I bet the attroney hopes this is used, because the borrower is going to need a good attorney!

Still have the olé license...

No convincing or hype is needed... Every seller I buy from signs it.. Its about protection... Certainly it may appear rather one sided however if you were to read my entire contract, which has been challenged a couple times unsuccessfully I might add, then you'll see I am not in the game playing business.

Thats the difference between begging and demanding... Heck a Superior Court Judge signed it... lol

Nice day to you too.

Michael

By getting an 80% first mortgage and then a 20% second mortgage, you have just got the property with none of your money involved. Gurus refer to this as nothing down. Sounds great on paper, but I have yet to physically meet anyone who has done one for real.

Originally posted by Realtyman:
By getting an 80% first mortgage and then a 20% second mortgage, you have just got the property with none of your money involved. Gurus refer to this as nothing down. Sounds great on paper, but I have yet to physically meet anyone who has done one for real.


Really?! Well you must not be looking in the right places! I see 100% financed seller carryback deals or subject-to purchases EVERY WEEK.

Originally posted by Michael Quarles:
Still have the olé license...

No convincing or hype is needed... Every seller I buy from signs it.. Its about protection... Certainly it may appear rather one sided however if you were to read my entire contract, which has been challenged a couple times unsuccessfully I might add, then you'll see I am not in the game playing business.

Thats the difference between begging and demanding... Heck a Superior Court Judge signed it... lol


Michael


Bet the judge is dead now! Post the whole contract and let's see how it washes out. Best thing to do is to let this thread die a natural death!
OK, This is nothing more than hipe, IMO, it is something that is totally out of line, putting something like this out for some poor newbie to jump on. Having the right to replace collateral with a dog house! BS! Had a judge sign it, please! Maybe some judge smokin crack! I know better! LOL!

Michael, you're in the business of getting people to pay you to coach them, mentor them or show them fantasic ways to do deals, so It's smoke a mirrors, hype and something that gains attention.

If I ever see anything like this used on a home seller, I guarantee you that I'll be successful in having it prosecuted!
One of my hobbies is screwing with investors and mortgage folks who screw over the public. Just ate up a seller financed lender for wrongful foreclosure. NEXT!

Similar crap already has been prosecuted here in my area, and this just will not fly everywhere.

Clearly not in good faith, as it is written!

Some people can fool some of the people some of the time....there is not a guru on the face of the earth that is going to fool me like that....There is NOTHING about this that is about protection Michael, it's almost a ponzi scheme! If there are any investors involved or bank funding, that brings up new questions as well.

The reason the government is changing many of the RE laws is because of so called "investors" screwing people, they can be sellers or buyers, it can go both ways. I'll bring this up later in another manner. And

I GUARANTEE you, that this site and others are seen by regulators and law enforcement, might keep that in mind, no way to keep lurkers out.

Be advised, I'm not here to win a popularity contest, In my book, there is nothing lower than praying on people trying to make a living, filing their heads with hype for a fee and then sending them off with scam like ideas, misinformed and mislead. The only thing worse are those who don't have enough time playing in dirt in their life time yet and think they have some unique knowledge or ability to advise others. Crap people, many of the people in the advising business have written me in the apst for advice in their area of expertise!!!!!!!!!

FOrgot to mention, this is not along the lines of the original post, nor was posting that "contract" as it had nothing to do with the questions posed......start a new thread if you want to debate this, Thanks, Bill