I’ve mentioned seller carry-backs now and again, but it’s time to dedicate an entire post to the topic. First, the basics, what is a seller carry-back? A seller carry-back is when the seller agrees to act like a bank, and provide a loan to the buyer for some, most, or even all of the purchase price of the home.
Seller carry-backs can be used by a buyer that is able to get a loan for 80% of the purchase price, but is unable to get a second mortgage for the remaining balance. In this case, the seller agrees to carry-back in 2nd position, behind the conventional first mortgage. With the declining market designation for all of Arizona, which has increased all but FHA and VA loan program down payment requirements by 5%, a seller carry-back can be a creative way to get a deal done, when a buyer doesn’t quite have enough cash on hand to get make the purchase.
Seller carry-backs can also be used by a buyer that is unable to get a primary mortgage, for which the seller agrees to carry the majority of the purchase price. In this case, usually the seller has an underlying mortgage, but they have a high equity position. For example, perhaps they are selling a home for $300,000, but only owe $200,000 on the property. To attract more buyers, without cutting ultra low on their selling price, they agree to a seller carry-back with a marginally qualified buyer. Perhaps this buyer has a bankruptcy from 2 years ago, or some other serious credit risk, that makes it very difficult for them to qualify for conventional financing at anything approaching a reasonable interest rate. The seller agrees to be the bank, via a seller carry-back, and then wraps their current mortgage with the carry-back agreement.
In this second case, the wrap needs to be written correctly, especially with regard to late fees, so that if the buyer is late with payments, there is enough money to pay the seller’s late fees as well as the underlying late fees from the seller’s original mortgage. Here in Phoenix, First American Title will gladly do the loan servicing for this type of wrap, for a very nominal loan servicing fee. First American Title collects the loan payment from the buyer, writes a check to the underlying mortgage company, and sends net proceeds to the seller.
In each case, the home is used as collateral for the loan by the seller, so if the buyer fails to make loan payments, it will probably require a foreclosure to get the home back from the buyer. Seller’s need to understand the cost of the foreclosure process, and are well advised to get enough down payment from the buyer at loan inception, such that if the buyer never makes a payment the seller has enough working capital to overcome those costs.
Going back to why you would ever consider doing a seller carry-back, there are currently 4345 single family homes for sale in Scottsdale, but only 110 of them are offering financing via seller carry-back. In Phoenix, there are 262 single family homes for sale offering seller carry-back financing, out of the 10,197 homes on the market.
Clearly, offering seller carry-back financing is going to place your home on a short list of homes for some buyers that cannot obtain a home any other way.
{ 2 comments… read them below or add one }
Artur Ciesielski, CCIM 03.25.08 at 3:50 pm
The issue I see with seller carry backs are that many lenders don’t want to play. If an owner can carry 80% and the buyer puts out the rest, then there is no issue, as lenders are not involved but, in most cases where seller carry back is noted on the MLS as possible its a case that the seller will carry 10%,15% or 20% the rest has to be either a loan from a lender and some portion of a down-payment from the buyer. Its the latter case that poses a problem with lenders. They won’t do it and if they do, often, the requirements are unreasonable for most borrowers and sellers.
Heather Barr 03.27.08 at 9:41 pm
My broker (ColdBanker, known to be stuffy & conservative) flat out doesn’t allow agents to recommend ‘wraps’ to our clients. They view them as loan fraud. Seller carrybacks I understand are slightly different. Have you ever done a foreclosure on a seller carry Steve? I wonder how much risk I’d be exposing a seller client to if I recommended they carry a buyer’s 2nd loan? Surely our current oversaturated market will make some oldies and goodies like wraps & carries popular again. Should be interesting!