So what is a Seller Carryback? In short, Seller Carryback financing is when the seller provides the financing.
Now, though, buyers have slightly more inventory to choose from and as a result, they have negotiating power, something that was unheard of this time last year. Time will only tell what happens with inflation and interest rates, but as mentioned in my previous articles, real estate is one of the best assets to own during times of inflation.
In real estate, there are many ways to go about purchasing a property. In these interesting times, it is important to get creative when putting together a deal. Buyers need to consider all their options. Not everyone knows about the type of financing that I am going to discuss here, traditionally called a “Seller Carryback,” or “Owner Financing.” Could this be an option you entertain for a future purchase or sale?
Usually, when we think of purchasing a home, we have a few well-known options to consider. A common way to acquire a property is by purchasing it with cash. This cash can be pulled through various sources like your bank or investment portfolios. However, the majority of buyers opt to finance their home through a lender, creating a monthly payment that is affordable to each specific client’s budget. The terms of these loans will vary.
So what is a Seller Carryback? In short, Seller Carryback financing is when the seller provides the financing. The seller acts as the bank or lender and carries the mortgage on the property, and the seller collects monthly payments from the buyer.
This could be a great option for a seller when the seller is struggling to sell a home because of lenders not allowing the full financing amount needed, or, to simply increase the buying pool for the home. For some, this is also a great investment opportunity. For buyers, this could be a great way to get into a property without going through the traditional means of qualifying for a loan. In many cases, this option offers more desirable contractual terms to the seller.
Some key benefits for the buyer include the following:
- Negotiating the interest rate. With rates continuing to rise, it is absolutely possible for the buyer and seller to negotiate an interest rate well below today’s market.
- No lender fees. Obtaining a loan through a lender comes with many fees. By utilizing the Seller Carryback, the buyer avoids these lender fees.
- Credit checks by the seller. Not all buyers and sellers will require a credit check. In other words, this is a negotiable discussion between buyer and seller.
In some cases, there is no need to have a typical 30 to 45 day closing. For example, the buyer could, in theory, close on the home in just a couple of weeks, or, pending any inspection or due diligence timelines, it could be even quicker to the close (or longer, if that is preferred).
The date of your first payment is also negotiable and could be delayed two or three months post-closing.
You will need to consider down payment terms. Typically what I see is the seller will want significant monies down to cover paying off the current mortgage, realtor representation fees, and to put a little in the bank. Not all buyers have these funds available on hand.
I often see deals with five or 10-year balloon payments (where at the time the balloon matures, the entire principal amount becomes due and payable). This could pose a risk to a buyer if there is not enough time to come up with all due and payable cash. The common remedy for such buyers is to refinance the home with a local lender to get the seller paid-off in time. Everything is negotiable and we do see sellers acquiring loans for 15 to 30 years.
Sellers benefit in that they are earning interest income over and above the principal that will be due at some point, as opposed to a straight cash sale.
The property is secured as collateral on the loan. The worst-case scenario is that the buyer becomes delinquent on payments and the seller is forced to foreclose on the home. In my opinion, this is the least desirable scenario for the seller, but at least you have the real property to fall back on as collateral.
The point I would like to drive home here is that if you believe in the value of your home and are confident that the prospective buyer will make the payments without fail, then this could be a great investment and means to facilitate the sale of your property. You could gain interest income on the unpaid balance for many years into the future, interest which would far exceed the rate being paid by banks on savings or money market accounts.
Having a realtor who understand the intricacies of this type of transaction and the paperwork required to make it happen is essential, not to mention the negotiating expertise that will come into play. Having the best representing you will have you resting assured that you are entering into the best deal for you. Good luck. FBN
By Blake Cain
Blake Cain is a local Realtor with Russ Lyon Sotheby’s International Realty. He can be reached at 928-856-9071 or blakecain.com.