What's a Seller Carry Back? 

So, your property is on the market at present and your Realtor has suggested that you should consider carrying a second mortgage/trust deed to facilitate the sale. You have heard the words "seller carry back" but, don’t understand the full implications. Who determines the interest rate, who collects the payments, what happens if the people stop making payments?

The seller carry back mortgage is a tried and true method of facilitating the sale of your house. Due to high interest rates, it was virtually impossible in the early 1980’s to sell property without some form of seller carry back. Sometimes the property was owned free and clear and the seller carried a first mortgage or trust deed. Sometimes there was a first trust deed which the buyer took over and the seller carried a second mortgage. During those years, the more sophisticated sellers and Realtors used a document called an All Inclusive Deed of Trust, more commonly referred to as an AITD or wrap around. In any event, these were the seller carry backs.

The question of determining interest rate is fairly simple. This is a factor of down payment and credit. If the buyer has 5% down and terrible credit, this is obviously very risky. Frankly, if the buyer has 20% down and good credit they probably wouldn't even need a seller carry back. The next question is how long has the property been on the market and how motivated a seller are you? In many areas of the country the seller needs to consider a seller carry back in order to sell the property. Often the seller can achieve a higher sale price by offering a seller carry back.

The interest rate is determined by the buyer and seller. The buyer obviously wants to pay 5% interest for 30 years; the seller usually wants 15% for 2 years. The "typical" seller carry back might be 8%-12% with a period of 5-7 years. If this is a second mortgage most first mortgage holders will require a minimum of a 5 year term

Payments on your carry back mortgage can be mailed directly to your address, but this may not be a good idea. In the last 10-15 years, loan servicing has become very tricky with requirements for the lender to report interest paid by the borrower on both Federal and State tax forms.

Also, late fee notifications, first mortgage delinquencies and fire insurance concerns make this an area that should probably be handled by a professional. In the 1970’s it was common for a savings and loan to collect a note for either no fee or $2-5 per month; that was merely a "bookkeeping service." The typical collection fee today might be $10-30 a month, depending on the size of the note collected. It is very important in the typical seller carry back to be firm on the collection of monthly payments and be prepared to institute foreclosure proceedings quickly if necessary (with sufficient equity). Your equity position (buyer’s down payment and property appreciation) can be quickly eroded by non-payment of taxes or payments to the underlying lender.

The typical seller carry back situation is 10% down, 10% seller carry back and 80% first mortgage. Obviously, this is a percentage of the purchase price. To make it simple, a $100,000 house would have a $10,000 down payment, a $10,000 seller carry back and a $80,000 conventional first mortgage deed.

Typical documents for Seller Carry Back Financing:

Statement of Information

Request for Notice of Default

Note Secured by Deed of Trust

CA Deed of Trust

As with all legal and financial matters we advise that you consult with a trusted expert. A local escrow office or title office can be of great assistance. We provide consultation and advice only in regards to extending credit and what terms(rate,loan structure, fees) are recommended based what other private lenders would extend in a similiar lending scenario. If you like to speak to a banker about this simply contact our office. We perform this service free of charge as a courtesy to our clients.