If you missed part one of this blog, be sure to check back so you can get the full scoop on these insider terms.
There are many reasons for a seller to accept a seller carry-back, but there are also great reasons for a buyer to negotiate a seller carry-back. These reasons are as follows:
1. The interest rate may be preferential over institutional terms, and there are usually no costs in the acquisition of the property.
2. Usually, a credit report or FICO score is less important to seller than it is to a bank. The reason for this is that the seller has no shareholders to report to. It is still important for the seller to obtain financial background documents on the buyer, so if he ever wanted to sell his note, he can prove the value of the financially viable payer on the note.
3. Another advantage of seller carry-back financing is that these loans can be fully amortized with no balloon payments and no due on sale clauses. In fact, the promissory note can be written in almost any manner for both the buyer and seller.
4. Another advantage of a seller carry-back note is that the owner of the property, with a seller carry-back note as a lien on the property, might be able to sell the property. This would allow the new buyer to assume the original terms of that note.
Furthermore, the seller who bought the property from the original seller who carried back the note might be able to sell the property and wrap the existing financing at a higher interest rate. This means that the first buyer who obtained the seller carry-back financing would not only receive a return on interest on any equity carried back, but he or she would also receive an over-ride above the amount of money that was paid out on the underlying loan, as compared to what the wrap is written at.
5. Another advantage is the original seller of the property might be asked, in a horrific real estate market, to accept the property back with no foreclosure filed. This would be called a “deed in lieu of foreclosure,” where the buyer actually hands the property back to the original seller. The reason why everyone might be interested in doing this is that a seller does not have to start a foreclosure, there would be no costs, and there would be no down time on a building that might be poorly managed.
The advantages for the buyer would be that there may be no foreclosure or credit problems reported on his account. Because of this, you may also find that the seller might be interested in re-negotiating the note in case the market really got that bad.
There are numerous ways to finance a property when you have a seller who might actually be willing to “be” the bank. Negotiating the terms of a note is just as important as negotiating the sale of the real estate. All concepts of fiduciary duty and disclosure are paramount in these negotiations.
If you are a real estate agent negotiating a note and trust deed for yourself and it is not in the client’s best interest, you will find that this is just as much of a violation of your fiduciary duty as stealing a piece of property at a below-market rate. Items like late charges, due-on-sale clauses, and other similar terms make the loan safer for the original owners; the seller needs to understand whether or not he is included in the note.
Another huge advantage of seller carry-back financing is its payout can be negotiated to meet the start-up needs of the new buyer. For instance, if a property is purchased needing a substantial amount of refurbishment to bring the property up to market rents, then possibly a seller carry-back mortgage or trust deed could be written at no payments, interest only, or a less-than-fully-amortized payment so the new buyer would have an additional source of funds to make the repairs needed on the property. A seller might be willing to do this because all improvements make his security worth more money.
As you are meeting sellers and negotiating for buyers, you will soon be able to determine what a seller’s needs are. When you find out that a possible seller carry-back mortgage would meet a seller’s needs more than cash and of course, those same terms help you, the buyer — you will find that you will be put into a position of receiving very agreeable terms, which will be a win for the seller because of your “insider” status.
The better the terms, the faster you will obtain a free and clear property, thus meeting the goals of this book and system. This is a huge tool in your “insider” tool kit to help you maximize net income on your real estate investment.
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