Seller Carry Back: Creative Financing for Real Estate Investors
Seller carry back financing offers an additional stream of income to real estate investors. A seller carry back mortgage is financing real estate investors offer to property buyers. Most often, seller carry back financing is for a small portion of the purchase price and combined with traditional lending sources.
Seller carry back financing terms are agreed upon by the investor and buyer. There are advantages for all parties involved. To the real estate investor, seller carry back financing offers the chance of additional income through interest made on the investment property. It also makes the property available to a wider range of buyers. This type of real estate financing offers the buyer the ability to purchase a home they might not be able to buy through traditional lending alone.
A promissory or mortgage note contract is used between real estate investors and buyers during seller carry back financing. The promissory note legally documents the purchase price, payment amount, interest rate, and end date of the seller carry back financing.
Here is an example of a common twenty percent seller carry back financing agreement. The real estate investor is selling a property for $100,000. The buyer would obtain a loan for $80,000 from a traditional lending institution. The investor finances the remaining $20,000 with a 10-percent interest rate over a period of five years. The buyer would pay the real estate investor 60 monthly payments of $424.94 totaling $25,496.
The real estate investor would have a steady stream of income for 60 months. Their investment would make an additional $5,496 from the interest on the seller carry back financing. The real estate investor holding the mortgage note can sell the note if they choose. A seller carry back promissory note can be sold partially or on its entirety. This would not change the terms of the note for the buyer, it would simply mean they are sending their payment to someone else.
Although seller carry back financing offers the buyer the ability to purchase a home they may not otherwise have, the buyer will have two mortgage payments. There are risks involved for the investor. If the buyer were to have financial difficulties, the investor carrying the seller carry back financing would be the last to be paid. In terms of bankruptcy or foreclosure, the lending institution would be paid before the investor carrying the second mortgage on the property.