I Take it Back! Seller Carry-Back Financing Leaves Sellers Holding Unwanted Paper

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So, you had a transaction that just couldn't get done without seller financing. The seller didn't "need" cash for all of his equity right away, but he did need to get the house sold, so someone (you, the buyer, maybe the seller) suggested that the seller could accept some of the purchase price from the buyer over a period of time.

A seller-financed mortgage note was created, and "they all lived happily ever after."

Er....wait....not so fast. I mean, sure, it happens that way sometimes, but there are a couple of things those sellers need to know.

  • that property insurance that you verified at closing? you need to make sure it stays in force, forever, or the security for the paper you are holding could go up in smoke; you should be listed as additional insured on the policy
  • you must keep an eye on property values, and specifically, the value of the property that secures your note
  • you must check on property taxes on a regular basis; property taxes come before your mortgage lien, so if the equity is thin and taxes aren't paid, the buyers may be tempted to walk
  • you need to send a 1099 every year
  • you should carefully track payments received because you may have to "prove" what the payoff is someday...
  • or, when the day comes that you want or need a lump sum of cash, you will want to demonstrate to the purchaser of your note that your note is a strongly performing note, to maximize the sale price

So, you see, there are quite a few reasons why a seller may become less-than-enthralled with holding that seller-financed mortgage note.

And of course, that's when you have them call me. :-)

We can talk about the options....why selling only a partial note may make a lot of sense, how they may be able to "trade up" to a much higher yield, and how much their note is worth.

So, who do you know who is holding a note and may benefit from some advice, or a discussion of their options?

Comments (1)

Art Hademan
Century 21 Real Estate Center - Mount Vernon, WA

Good food for thought Fritz!

Wonder how many sellers who carry paper ever think of the ramifications?

Feb 09, 2011 04:29 PM