Seller carry back .Do or Dont?

Question

I am selling one of my rental property and have got offer with 25% carry back ,Loan term is 5 years, 5% interest with 30 yrs amortizations.I have never done this before.Should I do this or not and what is the benefit or risk.Any advice will be appreciated .Thanks in advance.

Toan Le.

Greg Dickerson · Answer

It all depends on your goals and desirability of the property. If you can sell without financing and you want the cash that’s the way to go.

The risk is you are second behind a bank so if they default on the first mortgage you are in second position so you would need to step in and buy the property back to ensure you do not get wiped out in a foreclosure.

Account Closed · Answer

If you do a seller carry back on a second this here is what I would recommend from past experience of my own, not from recycled verbiage I read or heard. ( I’m surprised no one pointed this out yet.)

1. At the very least get a non revocable Authorization to release information from the buyer. This way you can check on their loan payments after close.

2. Put something in the second note and deed of trust/ Mortgage that says that a default on the first is a default on the second.

Reason behind this is if the first goes into default you can start your foreclosure first and take the property subject to the first lien. With the authorization to release you can then find out what the payments are on the first and make them to protect your interest.

The first time I took back a second I didn’t know to do this and got wiped out. I beat the first in the foreclosure race, but they refused to tell me the amount to bring loan current or the underlying loan payment amount and the best I could tell there wasn’t enough equity to wholesale the property and getting a new loan on the property wasn’t an option for me at the time. Also who wants to get a new loan if you could just take over the payments on the loan in place.

Hai Loc · Answer

I would do it if you are satisfied with the amount of cash you receive at closing. That 25% may reduce a lot of potential capital gains. Also he has more skin then the carry back.

DJ M. · Answer

Don't know your market, but in mine we get a decent amount more then 5% interest on seller finance. 5% barely outpaces inflation. To answer your question somewhat, make sure to do your due diligence on the buyer. My friend just had to take one back 1 year in after buyers stopped paying. He didnt do his homework, and now hes paying for it.

Toan Le · Answer

Thank you all for your precious advices ! Wish you all the best.

Luke G. · Answer

I use these all the time, they can work quite well, but as others have said, you need to to underwrite the seller.  I've gone as far as sending my personal financial statement and tax returns to seller's to get them more comfortable being in second position.  It can work well, it can be a win-win.  It lowers their tax bill for this year and I'm more willing to pay a bit extra as I don't need as much down.

Tj Hines · Answer

@Toan Le the benefit to this is you won't be taxed heavily on the deal, because you are deferring your profits through monthly payments. So you are only being taxed on the deferred payments and not the entire gains you would walk away from the table with if you didn't do a carry back. Make sure the borrower is credible and can perform. If they don't perform, well then you know how that goes.

Toan Le · Answer

Dan K.Around 30%

Dan K. · Answer

As @Lien Vuong said, you need to underwrite this deal as if you're a bank.

In addition, how much equity is the buyer going to have? If the buyer is doing 100% financing, there is very little "meat left on the bone" if the first mortgagee forecloses on the property.

Lien Vuong · Answer

You have to sit in the stance of the Bank. I think it would be a reasonable offer but you also have to go through the same screening as a bank or underwriter does. How is the borrower? How secure are they? What is their reason for structuring the deal that way?

Seller carry back .Do or Dont?

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