Pinetop White Mountain Blog

Good Afternoon Everyone,

A few days ago I suggested to sellers that if they didn't have a note against their property they might consider carrying a note.  There are many buyers out there now who for one reason or another cannot qualify through conventional means for a loan.

After that post I had several calls from Buyers looking for Seller Carry-backs so they could purchase a home.  Many of those Buyers were a bit confused on what having the Seller Carry the Note really meant, and what would be required of them should they pursue that option.  I decided that I needed to follow-up that post with some things to clarify what a Seller Carry is and what would be required of the Buyers.  I really appreciate the calls, and hopefully some of them will turn in to serious buyers, but....there are some things buyers need to know if they feel a Seller Carry might be an option for them. 

First and foremost, you are going to need a significant amount of cash up front.  Sellers will usually require a minimum of 20% in Cash as a down payment, to even consider carrying a note.  They are acting as a bank and as such, if the buyer defaults they will have to go through foreclosure proceedings the same as a bank.  It is not an inexpensive process.  They must cover themselves financially for this reason.   

Second, you will probably be paying a much higher rate of interest than you might through a bank.  Usually 2 to 5% higher interest.  The reason is the same, if the seller is going to carry the note they want a good return on that money.  They may be looking at the Carry-back as an investment and they will want it to be a profitable investment if they are going to take the financial risk associated with that Carry-back.

Third, you need to anticipate that you will have to refinance that property fairly quickly.  Most Carry-back Notes requires a balloon payment (payment in full) within just a few years.  If you have any doubts about your ability to do that, don't even consider entering in to this kind of agreement.  You need to start planning for that eventuality immediately.  If you have credit issues you need to start working on getting your credit cleaned up right away.  Talk to a lender, find out what you will need to do in order to qualify for that refinance in a few short years.  Five to ten years may sound like a long time but from my own experiences I can tell you that date shows up before you know it.    

Finally, you may be required to sign an Addendum to the Purchase Agreement stating that you will not in any way modify that property without the seller's permission until the note is paid in full.  Keep in mind that if you don't pay the seller is going to have to take the home back to resell it. If you modify it in a way that makes it less marketable than it was when you bought it, you could be open to legal consequences for those actions.  

These situations can work very well if everyone is fully informed and both parties are aware of their responsibilities to the other.  Just be careful and make sure that the agent you have representing you is looking out for you in the transaction.  It can be a great option if handled properly, however, it could come back and bite you if you aren't fully informed about your responsibilities in the transaction.   

Give me a call if you have any questions about this or any other Real Estate Matter.  I am here to help. 

Thanks for reading.  Have a wonderful weekend. 

Sandra Paulow, Associate Broker, GRI, SFR  (928) 242-0300

Your High Country Connection for Real Estate!   :-)