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“Seller carry back trust deeds” are becoming a popular way to buy and sell real estate. This type of transaction requires sellers to ‘carry back’ all or part of the financing. This can be helpful for buyers with bad credit who do not qualify for bank financing or those who cannot afford a large down payment.
Seller carry back trust deeds are similar to mortgage notes used to secure financing through banks. When sellers offer partial owner will carry financing buyers are required to obtain a real estate loan for the balance. Bank loans are secured by the first mortgage and sellers carry the second mortgage.
Regardless of whether sellers carry back all or part of the financing, these loans are not the traditional 15 or 30 year mortgage. Instead, seller-financed mortgage contracts extend for 1 to 5 years to give buyers the opportunity to improve credit scores. Afterward, buyers are required to refinance mortgages through conventional lenders or pay the loan off with cash.
Sellers normally require buyers to provide a down payment to secure the property for sale. Seller-financed payments must be recorded and reported to the Internal Revenue Service. Sellers should consult with a real estate lawyer to ensure seller carry back trust deeds are legally-binding and comply with IRS regulations.
There are many reasons that sellers enter into owner will carry financing. The most prevalent is to obtain full asking price. In today’s market it has become challenging for sellers to attract buyers willing to pay full price because of the abundance of foreclosure houses.
These distressed properties are usually sold at 20- to 30-percent below market value. Buyers who qualify for bank financing often turn to lower priced houses. This has made it increasingly difficult for sellers to obtain fair market value for their property.
Offering seller carry back financing allows sellers to attract buyers willing to pay fair market value in exchange for the opportunity to buy a house with bad credit. However, borrowers must commit to engaging in credit repair strategies in order to qualify for mortgage loans when the contract expires.
Seller carry back trust deeds are secured with a promissory note. The property deed is filed through local courts to record a property lien. When the loan obligation is fulfilled legal title transfers to the buyer. If borrowers default on owner-financed contracts the property owner can repossess the real estate through foreclosure.
Seller carry back financing can be a good strategy for buyers with bad credit; sellers who have been unsuccessful in attracting qualified buyers; and real estate investors who want to generate positive cash flow from investment properties. However, those who participate in this type of financing must engage in due diligence.
Owner will carry contracts should always be drafted by a lawyer to ensure both parties are protected in the event of default. Buyers should obtain real estate appraisals and property inspections, as well as researching public records to ensure the seller is permitted to sell the property.
When the property being sold is secured with a mortgage note, buyers must obtain verification the loan is in good standing. Unfortunately, there are sellers who enter into lease purchase option agreements and seller carry back transactions for property that has entered into foreclosure.
As long as all parties engage in ethical behavior, conduct due diligence, and execute proper documents, seller carry back trust deeds can offer a win-win situation to everyone.
More from this Contributor:
Are Mortgage Loans for Bad Credit a Smart Financial Decision?
Using a Lease Purchase Option Agreement to Buy Real Estate
How to Sell a Home on Your Own