Making Sense Of Seller Carryback Financing
Seller carryback financing is an ideal way to fund a real estate investment purchase. Many people think it’s complicated, but it isn’t. It cuts out the middleman, such as a bank or other lending institution, and creates a seamless sales transaction between the owner of the property and his or her purchaser. This one-on-one approach to funding is easy to understand once you make sense of all its details.
The Owner Finances the Property
In this type of funding arrangement it is the owner from whom you are purchasing the property that finances the deal. In other words, you are buying the property directly from him or her, and rather than get a loan through the bank, the two of you come up with the purchase amount, the monthly payments, the interest, and the amortization duration. The entire deal is worked out between you two.
You Receive the Deed
Even though you are purchasing the property by making monthly payments, the title is transferred into your name and you secure ownership and all of its responsibilities. This does not mean, however, that you can default on your payments. The previous owner has a legal right to the monies owed and can pursue damages if you fail to see the contractual obligation through to fruition.
Types of Property Owners to Look For
There is one caveat to seller carryback financing and that is the property owner’s mortgage. If the investment’s mortgage has not been paid off, the issuing bank does have right to enforce what’s called a “Due on Sale” clause that is likely in the original document. This means the bank could insist the owner pay off his or her mortgage in full, and if he or she can’t, it could foreclose on your new investment.
How to Avoid This
The best way to avoid this possibility is to work with a residential or commercial property owner that has paid his or her obligation in full. This ensures a clean transaction without any bank involvement whatsoever. It also gives you and he or she the ability to come to a deal that works best for both of you, as the owner is not under pressure to continue making monthly mortgage payments
Seller carryback financing is very straightforward. If you see a piece of investment property you like, you approach the owner to see if he or she will finance the deal directly with you. In many cases, the owner will, as both of you benefit from the transaction.