Have you found a project opportunity with a seller who has substantial equity in the property? This is a chance to present a proposal for creative financing that benefits both parties without going through a bank or hard money lender. Seller carryback loans occur when the seller provides the financing for the buyer.

Sellers are most likely to carry back the loan when they don’t need the full purchase price immediately, can use the monthly cash flow, and will benefit from the interest earnings.This is more likely when the seller is older andneeds the monthly payment income,the seller has had the property listed for some time without an acceptable offer,and/orthe seller needsa quick sale because of a personal situation (such as divorce or financial issues).

How does seller-carryback financing work?

• The buyer and seller agree on an interest rate and a down payment, if any. A down payment is an up-front cash incentive for the seller.
• The buyer and seller agree on a term for the loan.The loan term will providecontinuing monthly income to the seller in the form of payments.
• A legal contract is created and signed. The seller may handle all the details themselves or hire a loan servicing company to calculate principal and interest, collect payments, send statements, and so on.
• Be aware of changes in legal requirements for seller carryback financingand be sure you have qualified advice on the loan so that it meets the limitations in effect at the time since those requirements may change.

Keep in mind that the seller can only sell his or her own equity portion of the property. Obviously, there are limitations if there are first and/or second mortgages or any other liens still outstanding. The arrangement can still work if the buyer settles these encumbrances as part of the purchase deal and the seller-carryback is only for the remaining value in the purchase contract. This is still an attractive arrangement for some people who want to be relieved of their outstanding loans on the property.

What happens if the buyer defaults?The seller has the same position that a traditional bank would have, so the seller can foreclose and take back the property.

Seller carryback financing is a creative means for financing a real estate investment project that can have benefits for both buyer and seller. Instead of full payment for the property, the seller carries the loan and receives the loan payments with interest. Typically, these arrangements are for much shorter terms than traditional bank mortgages. Usually, only sellers with full or substantial equity in the property are candidates for this arrangement. Keep seller carryback financing in mind as a useful way to fund a promising project!

Have you learned which sellers in your community have higher equity in their property?

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