CREATION OF A SELLER CARRY BACK NOTE...
The following discussion can apply to first and second position liens with minor modifications. This type of transaction usually occurs because there are not enough prospective buyers who can qualify for conventional financing.
If there were, there would be no need for the seller to take back a note. Even when the buyer can qualify for a loan, the buyer may not have enough for the entire down payment. In this case, the buyer gets a first loan from the institution, and the seller takes back a second note and deed of trust.
Because the buyer is able to buy a property that he or she would not otherwise have been able to buy, and because the value of the $90,000 face value note in the secondary mortgage money market is only about $70,000, assuming yields in that market are 15% at the time of this sale, the buyer may be willing to pay more than the current appraised market value of the property.
This is true because with a seller carry back note the buyer doesn’t have to pay points, fees and other costs usually associated with an institutional loan.
The seller carry back note can be structured in an almost limitless variety of ways. The note can be fully amortized with no balloon payment (as in this example), amortized over a number of years, say 30 years, with a balloon payment at say 10 or 12 years. The note could be interest only with a balloon.
It can even have stepped interest payments (for example, 8% in year 1, 9% in year 2 and 10% in year 3 through the end of the term), or graduated payments (for example, $500 per month for the first 12 months, $600 per month in year 2, $700 in year 3, etc.) The value of the note in the secondary mortgage money market depends on all of these parameters and more.
Here Is A Typical Example:
A free and clear property (with no existing loans) was sold for $100,000. BUYER gave SELLER a $10,000 cash down payment and SELLER carried back a purchase money Note and Deed of Trust for $90,000.
SELLER was getting no action on the property when trying to sell it for $90,000 cash (the appraised value). Potential buyers would have had to pay all cash or qualify for a loan.
SELLER offered to sell the property for $100,000 with 10% cash down payment to attract more buyers.
This sale is equivalent to selling the property for $80,000 cash because the SELLER would get about $70,000 for the note if he sold it immediately, assuming the market yield for these types of notes was 15% in the secondary mortgage money market.
Give us a call for advice before structuring a seller financed note.