What is the Down Side to Carrying Back?

Question

P G.
· Huntington Beach, California

I'm selling a small investment condo I own free and clear. The asking price is 40% below what I paid for it in 2005. I have three offers and I'm trying to decide which way to go. Most would say take the cash and run, but I'd like to recuperate some of the money I've lost if possible.

The first offer is a full price with 15% down, seller finance balance at 8% over 5 years. This buyer will occupy the property.

Second is a cash offer $2000.00 above asking. This is a investment buyer.

The third offer is $8000.00 above asking with 48% down, seller finances at 8% over 5 years. This also is an investment buyer. This sounds to good to be true and maybe it is. My question is what's the down side/liability on carry back? What if they default? How tough is it to foreclose etc? Are there other aspects to seller finance that I should looking at to protect myself.............

I would appreciate any feedback , Thanks,

Pattic

Steve Babiak · Answer

If you seller finance to an investor who will be renting it out, be sure to get an assignment of rents, so that if the buyer defaults on payments you become entitled to the rents - rather than having some investor doing "rent skimming".

Account Closed · Answer

oh  now i get it..you are just trying to be a smart ass :)   well since anything i say you'll say is risky, seems like a set up to me..hwoever i'll add that holding a note is riskier than taking the cash..who the heck knows the position of the seller..maybe she wants to retire and move to greece..like i said, knowing that would help

Account Closed · Answer

bill, not sure what the heck you're trying to say..in fact, it seems you agree with me..perhaps i misread..of course it depends on the poster's goals and equity position..but it seems easier to me to sell, take the money at once, pay the taxes once, and then have a lump sum to reinvest...most people can beat 8% easily right now...why bother with the risk of holding a note if it can be over and paid off soon????

Account Closed · Answer

i just want to ask a question right quick...you said you received a cash offer 2,000 over asking?? why even consider the financing at that point?? you can make so much more money by cashing out (assuming you have equity) and using that money to invest TODAY, then taking payments and having to wait for money to come in..

Bill Gulley · Answer

Hmmm, I agree talking the cash is probably the safest, I never said it was not.
But I will add that taking the cash in some situations is a very poor decission. If anyone is an estate planner or attorney, I can cover some of those matters.

Bryan, you are the one who came in suggesting that money be invested at  a higher rate, not me.

If you look at the option you propose then you need to look at the alternatives which includes several issues, risk being the primary concern.

Looks to me like you came in with an opinion and mentioning an arbitrary rate that you didn't fully consider before you posted.

And I mentioned initially, selecting cash or financing the deal depends on her needs which have not been mentioned, so we are speculating, but your ascertion was taking cash would be better, my reply is not always.

:)

Cheryl, early payoffs are a risk concern and can be managed in several ways depending on the circumstances. Prepayment penalties are one way but may not be legal in some states and may be challanged in all if equity was financed. The best way is to agree for a borrower to indemnify the private lender for any tax liabilites created out of an early payoff.

We are getting off topic, be happy to address this in another thread!

Cheryl C. · Answer

This is a topic of interest to me as it is my anticipated exit strategy (and has been for decades).  I have a good bit of knowledge of the foreclosure process in my jurisdiction and I think this is very important.  I just hope rates are higher in about ten yrs.  One risk that I see is getting paid off early!  My mother recently took back a mortgage (not her first time) and she sure doesn't want to be paid early.  I inserted a pre-payment penalty in the mortgage.

I think some of it depends on your individual situation.  I see holding a mortgage as much like holding a bond in terms of your asset allocation.  I don't see buyers who want a seller to hold the paper as dubious credit risks.  There was a time when the only financing that I could get was an owner takeback.  I had about 5 places financed that way at one point.

Bill Gulley · Answer

Bryan, taking the money and running depends on the need for the funds. If not needed, taking a note deferres the gain, taxed as received while it still earns interest, that portion has an effective higher rate.

There are few investments at the same risk that will beat the note rate. The collateral taken is very well known to the note holder and depending on the underwriting, the risk can be pretty low. Note rates are usually 10% but can vary. The terms can be set to meet future needs, payments can be varied and modified in some cases. Notes can be used as collateral or payments sold at a discount.

Few investments are out there that can be personally managed beating that yield, given the risk assumed. I don't know of any 8% CDs and if there were, while the principal is insured, interest may not be and any bank or other entity paying 8 right now has some risk issues.

If you know of a limited risk investment paying 8, please mention it. 
:)

Bill Gulley · Answer

Bryan, not to answer for the op, but it's difficult to reinvest small sums at a higher rate after taxes, given the risk than a note on your property. What is a better alternative investment?

Bill Gulley · Answer

Kevin, sounds like you're a rinse and repeat type, intentionally or by accident, sorry but that's pretty poor.

My originations were over 85%, applications processed after formally taken, my persistancy ratio hit 98%, deals closed after initial underwriting and sold, secondary was among the top 5% nationally for closings during all years in the business. Defaults were around 7% in the 80s and 90s. That's quality underwriting, I'd suggest you get a mortgage broker or if you used one, find another one. Grossly unqualified people have no business being put in any pipeline driving your costs upward or wasting time, now or ultimately in the near future.

I'm really glad to see the new mortgage regulations, while I think there could have been a better approach, at least there is an attempt to curbing incompetence, fraudulent dealings and intentional scamming. Having money doesn't make anyone a good lender or borrower. :)

Kevin Dickson · Answer

As I mentioned over on the other thread, success rate when I am the seller and I carry back has been only 33%.

Who else can report your success rate when doing this?  I was surprised it was so bad.   The takeaway for me was NEVER carry back a second or third mortgage, unless you are ready to kiss that money goodbye.

What is the Down Side to Carrying Back?

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