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Seller Carry Backs: Finance a Home Without a Mortgage

Most people have never even heard of a seller carry back, yet it can really pay to understand this real estate strategy.

What is a seller carry back, anyway? A seller carry back is simply owner-provided financing. You may also see this advertised as seller financing or owner will carry (OWC).

This strategy—carrying back a note—can be a useful real estate tool for both the seller and buyer. Seller carry backs are becoming increasingly popular in today’s economy as getting traditional home loans from banks becomes more challenging. Here’s how it works:

When a homeowner wants to sell his house but has trouble getting enough qualified buyers due to tight lending practices, the seller can “carry back” the note on his own house.

1. The buyer and the seller sign a promissory note. This note says the buyer promises to pay a specific amount of money, with a specific interest rate, at a specific time. Sounds like a mortgage. The only difference is that instead of making payments to a bank, the buyer makes monthly payments to the seller.

2. The seller moves out, transfers title, and collects monthly payments from the buyer. The seller acts like the bank, holding the note and collecting payments. If at any time the buyer stops making monthly payments, the seller has the opportunity to legally foreclose and take the property back. He can then try to sell the property in a traditional sale, or carry back a note again.

Selling a Home with a Seller Carry Back

If you’re a seller, carrying back a note on your house may seem risky. In reality, properly structuring the contract can make it safe. It’s critical to use an attorney or state-approved contracts from your local Realtor. Then, get the buyer’s written consent to pull their credit report, just as the banks would do. Look for several years of on-time payments and make sure there are no red flags like excessive debt or past charge-offs or foreclosures.

Though the terms of the carry back are negotiable, as a seller you want to get as much of a down payment and as high of an interest rate as possible. The reason it is so important to get a high down payment, such as 10% or 20%, is that depending on what type of loan you originally took out to buy the property, transferring the title may trigger the due-on-sale clause.

The due-on-sale clause states that once title is transferred, you must pay the remainder of the loan in full. If you have lived in the property long enough to build some equity and you get a good down payment, you may be able to pay the remainder of the loan in full. This is an important calculation to figure before carrying back the note.

Selling the Note

If the seller prefers to receive a lump sum rather than monthly payments, she may be able to sell the note. Some private investors and mortgage brokers will pay cash for notes (at a discount) and receive the monthly payments from the buyer. This can give the seller freedom to purchase a new home, make another investment, or pay expenses.

Investors typically want at least 10% buyer equity. They also prefer that the buyer has a credit score of 650 or higher. Notes with interest rates above 9% which are amortized over 30 years with a balloon payment in seven years tend to get the best rates from investors. If you want to sell a real estate note to an investor, you can often find one asking a Realtor for a referral.

Buying a Home with a Seller Carry Back

The seller is not the only one who benefits from a seller carry back. Buyers who do not qualify for conventional loans can purchase excellent properties with the use of seller carry backs. Additionally, if a buyer owns multiple properties, such as three rental units and one vacation home, the interest rates would be exceedingly high on a conventional loan and the buyer may have to obtain a portfolio loan. Buying a house where the seller carries back the note will allow the buyer to negotiate a reasonable interest rate without the need to take out another loan for her primary residence.

Threats to Seller Carry Backs

Though seller carry-backs allow for more real estate transactions, stimulating local economies, a recently-passed law threatens to decrease the ability of sellers and buyers to use seller financing.

The SAFE Act, passed in 2008, requires that anyone who originates a loan be licensed by the state Department of Real Estate as a mortgage loan originator. This applies even when originating loans in the form of seller carry-backs on your own residence, with the exception of homeowners who carry back notes on their own house and sell to immediate family members. Additionally, sellers may carry back one note on their own house to a non family member, every three years. Although this still allows homeowners the opportunity to carry back a note on their own house when they need to sell, it severely restricts seller financing as a whole.

About the author

Sarah Messali

Sarah Messali

Sarah is a real estate broker based who enjoys helping both buyers and sellers. She has been recognized with a number of awards, including being named one of the best real estate agent in San Diego as voted by Union Tribune Readers.

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