People are coming up with some creative solutions, but one that has been around for many years is a little known, but very simple one: The Seller Carry Back (sometimes also referred to as "the seller holding the Note")
What is a Seller Carry Back? Simply this: The owner of a home, who owns the property free and clear, acts as the lender, and "lends" the buyer the money to buy the home.
Before I get into an explanation of what that means, let me clarify one thing. The Owners MUST own the home outright. It must be free of any mortgage. If it is not, then the situation becomes what is called "A Wrap", which is a more complex, though not undoable, situation.
The thing that confuses people the most about a Carry Back is the notion that the owner/seller is "lending" the buyer the money to buy the home. Obviously, no cash is actually transferred from the seller to the buyer.
The Title of the property is transferred from the Seller to the Buyer in exchange for a promissory note for the sales price of the home. The buyer agrees to make installment payments on the home at a specific interest rate, usually with a balloon payment due in a specific period of time. If you think about it, this is exactly what happens with a conventional loan, but the actual "loaned amount" is on paper only.
Why would a Seller want to do this? Why would a buyer??
The advantage for a Seller is the chance to make substantially more than just the sales price of the home. Imagine if you were a Seller, and you agreed to sell your home to a buyer on a Carry Back for the price of $120,000, at an interest rate of 6% in an amortized 30 year loan, with a balloon payment due at 5 years.
Sounds like gibberish, right? Its actually pretty simple. The Buyer is going to make you monthly payments, of principle and interest, at 6%, with the remaining principle balance due in 5 years.
So, what's the advantage?? Over the course of those 5 years, the Buyer is going to pay you almost $35,000 in interest, while they lower their principle to $112,000. That means, when they refinance the home to pay you the remaining balance, you didn't just make $120,000 off of the sale, you made $155,000 total!!!!!!!
That's Right!!! By carrying the loan, you made yourself an extra $35,000!!
So, what's the catch? What's the down side? The biggest downside is the buyer not paying, and then you have to foreclose on the property. And depending on the condition the buyers leave the home in, that may be a big risk. Another risk is that at the time the balloon payment is due, the buyers may not qualify for a mortgage, or the property may not appraise for the value.
These things to consider, and there are safeguards that can be put in place to avoid, or limit these risks.
Why would a buyer want to purchase a home through this means?
The real estate market over the last 2-3 years could be summed up by saying "Bad things happen to good people". Or, as a lawyer friend of mine likes to say, "Bad luck happens".
Many people who have lost their homes due to the market and the economy are people who in other conditions would be qualified buyers. They're people who need some time to get their feet back underneath them financially, and might not need too long to do so. These are the people who can be good candidates for a Carry Back.
The advantage to these buyers is that they get to buy a home when they can't qualify for a conventional loan, and enjoy all the benefits of home ownership while repairing their credit. People who have sold homes in short sales are primarily the people who fit in this category. A short sale does impact your credit, but for a shorter period of time than a foreclosure, typically less than two years. So, a carry back with a 3 or 5 year balloon would be an ideal means for them to get back into a home, while giving them a great shot at refinancing when they're able.
And there are other variables that can make this more attractive to the Seller. Currently, the minimum down payment required for an FHA loan is 3.5% of the sale price. On $120,000, that's $4,200. There's no reason that a Seller can't require a down payment on a Carry Back as well, so there's the possibility of an up-front lump sum payment, be it a 3, 5, or even 10% down payment. And many buyers would jump at the chance to purchase a home under those conditions!
Carry Backs are a very attractive option, under pretty specific conditions, but they have the possibility of bringing a Seller a handsome return for (in my opinion) a fairly low risk.
If you have any questions about Seller Carry Backs, as either a seller or buyer, don't hesitate to email, or call me!
Erin Goldbach
Designated Broker
Vanguard Platinum Realty
602 524 0186
Erin@ErinGoldbach.com
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