One of these ways is when the seller finances a portion of the purchase price – also known as a seller carry back loan. This is one of the financing strategies that fall under the umbrella of owner financing.
Seller carryback financing can help both home buyers and sellers. Sellers that use this strategy receive interest payments just like a bank, and buyers can purchase a house without getting a conventional loan.
If these terms are new to you, you might wonder how this is possible.
This article is intended to explain the entire seller financing process so that you will know how it works and be able to decide if it is the best option for you. It discusses topics such as who can owner finance a house and the pros and cons of seller financing.
If you’re wondering if a seller carry back could help you sell your house or are just curious about real estate topics, keep reading and you’ll learn all about it!
What is a Seller Carry Back?
A seller carry back is when the seller of a property finances a portion of the sales price for the buyer. In essence, the seller acts as the bank and receives monthly payments for a period of time. This is an alternative approach to the traditional real estate sales process where the seller receives the full purchase price in a lump sum.
In a seller carryback transaction, the seller does not have to supply the funds for the new loan. Instead, the buyer signs a promissory note describing how they will repay the loan.
How Does a Seller Carry Back Work?
A seller carry back works just like a traditional mortgage. There is a purchase price, down payment, interest rate, and term length. What sets owner financing apart from a conventional mortgage is that all of the terms are negotiable between the buyer and seller.
In many cases, the terms include a balloon payment, meaning that the borrower must pay the remaining balance after a set amount of time. This is usually accomplished by selling the house or refinancing it with a traditional lender.
What If Seller Owns the Property Outright?
The simplest version of this owner financing transaction is when the seller owns the property free and clear, meaning there are no existing loans on it. In this case, the buyer pays the seller a down payment, and the seller finances the rest of the purchase price.
What If Seller Has a Loan?
It is still possible to do a seller carry back if the owner has a loan on the property. In this case, the buyer can take over the balance and payment of the existing loan. Then, the seller carry back loan will be in addition to that original mortgage and be in the second position.
Here is an example:
The agreed-upon purchase price on a house is $250,000. The owner has a remaining balance of $150,000 on their loan. In addition to taking over that balance, the buyer gives the seller a promissory note for $80,000 and a down payment of $20,000. Then, the buyer is responsible for both payments, the seller’s original payment and the payment of the new loan.
Who Is Responsible for Taxes and Insurance?
In a seller financing transaction, the buyer owns the house, so they are responsible for paying the property taxes and insurance premiums.
Who Can Sell Their House With Seller Financing?
Anyone that owns a house can sell it with seller financing. If you are considering selling your home this way, make sure to work with a real estate attorney that is experienced with these types of transactions. They will handle all the paperwork and ensure everything is documented properly.
Benefits of Selling a Property With Seller Financing
There are several benefits that might make offering seller financing the best option for you when selling a home.
Sell for a Higher Price
Any type of creative financing such as a seller carry back is considered buying on “terms.” In these cases, the seller can often receive a significantly higher price than they could on a straight cash sale.
Often, the buyer is just as interested in the terms, such as interest rate and down payment, as they are in the price.
If you are having difficulty getting a property sold,This will open up your buyer pool to non-traditional buyers and increase your chances of getting it sold.
On top of that, the closing time with a seller financed transaction is often much faster than a sale with conventional financing. While a traditional sale typically takes at least a month to close, a seller financed deal can be completed in a couple of weeks.
When offering seller financing, you are acting as a bank and making money on interest. When someone gets a loan to buy a house, they typically end up paying over double the price they purchased the home for. This is due to the interest rate the lender charges.
When you are the lender, you collect monthly payments and make all of this extra income instead of a bank.
Can Sell a House That Needs Repairs
Many home buyers looking for seller carryback financing are willing to purchase a house that needs work. Instead of putting in the effort to get your home list-ready, you can sell it as-is with seller financing.
Lower Closing Costs
While the closing costs on a traditional home sale can be several thousand dollars, a seller-financed deal typically costs no more than $2,000. Although the buyer usually pays the bulk of the closing costs, this can still help the seller. For example, the buyer can use those savings to make a higher down payment.
When you sell a house, there are often capital gains taxes that you must pay based on the profit you made. With seller carryback financing, this tax burden is spread over time instead of being due in one lump sum.
Downside of Selling a Property with Seller Financing
Although there are several benefits of offering seller financing, there are some potential downsides that you must consider.
Must Wait to Receive Full Payment
When seller financing a house, you agree to receive payments over time instead of collecting the full sales price in one lump sum. However, you will receive more in total due to the interest rate.
If you are looking for a lump sum payment, you should likely list your house with a real estate agent or work with a cash buyer.
There Are Potential Risks
As with many real estate transactions, there are risks involved with a seller carry back. Just like borrowers sometimes stop making payments and the lender is forced to initiate a foreclosure, the same could happen to you. However, the house serves as collateral in this case, so the risk isn’t extremely high.
To reduce the likelihood of this happening, you should adequately interview the borrower and request a credit report from them upfront. Also, make sure to maintain a relationship with them.
If you collect a considerable down payment on the house, you will still be in a good financial position even if you have to take the house back.
Should You Offer a Seller Carry Back on Your House?
This is ultimately a decision that you must make for yourself. However, we hope that the information we’ve provided here has given you some clarity on the topic. There are some major advantages with seller carryback transactions, but they don’t fit every situation.
If you need to sell a house in Huntsville or any of the surrounding areas, we would be happy to talk with you and discuss some options. If you like the benefits that seller financing offers, we can make that work for you. Or, if you’re looking for a simple sale, we can make a cash offer on your home.
Good luck with your home sale!