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By Simon Volkov
Seller carry back mortgages are quickly becoming a popular method for financing real estate. Using this technique, property owners provide financing to the buyer. In some cases the property owner will carry back only a portion of the mortgage note and the buyer finances the balance through an assumable mortgage. In other instances, the Seller will finance the entire note.
Seller carry back mortgages are relatively straightforward and can benefit both the seller and buyer. However, they are not without risk and precautions should be used when engaging in this type of real estate transaction.
The biggest risk Seller’s face is the potential for the Buyer to default on the loan. Many individuals who engage in seller carry back transactions are unable to obtain lending through traditional sources. Typically, they are considered high-risk because they are credit-challenged or have limited financial means. For this reason, there is increased potential for loan default.
The main risk to Buyers occurs when the Seller does not own the real estate free and clear. If the Seller owes money on the property and defaults on his mortgage payment, there is potential for the Buyer to lose their entire investment.
The advantages of seller carry back financing generally outweigh the risks. One of the most advantageous aspects of this type of real estate deal is it provides the Seller access to more potential buyers. Unfortunately, there are more people with low credit scores and inability to obtain traditional financing than ever before. Offer seller carry back financing opens the door to Buyers who would otherwise be unable to purchase property.
In order to protect both Seller and Buyer, certain legal documents are required. Although these documents can be drafted without legal assistance, it is strongly advised to retain the services of a real estate attorney. At minimum, an attorney should review seller carry back documents to ensure they are legally binding and will hold up in a court of law. Although there are certain rules and restrictions, seller carry back mortgages can usually be crafted to suit the needs of both Seller and Buyer.
Before entering into a seller carry back real estate transaction, it’s advised both parties conduct background checks and obtain credit history reports. Sellers must adhere to Usury laws, which specify the maximum legal interest rates for loans. Each state regulates allowed maximums, but generally rates fall between 6 to 18 percent.
Additionally, late fees should be incorporated into the seller carry back agreement. Also regulated by Usury laws, late fees usually cannot exceed 10 percent of the mortgage payment. For example, if the monthly mortgage payment is $1,000, the late fee could not exceed $100. If you are not well-versed in the Usury laws of your state, it is highly advised to obtain legal counsel before signing on the dotted line.
There are many different ways to craft a seller carry back mortgage. If you do your homework, conduct due diligence and consult with an attorney, you may find seller carry back mortgages to be one of the best real estate deals available.
About the Author: Simon Volkov is a private Real Estate Investor helping individuals who need to liquidate their
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