"SELLER CARRY BACK" FINANCING
This information provides general outline of the "seller carry back"
financing in conjunction with further sale of created debt instruments
in the secondary market. Dollar Express Corporation will not be responsible
for any damages or claims of any kind which may result from use or misuse
of this information by a reader.
1. Considerations when he/she decides to sell his/her real estate
A. The seller wishes to receive cash for his/her real estate
and expect the buyer to take care of financing either through a bank or
a mortgage company. The sale takes place when the buyer agrees on the price,
qualifies for conventional financing, has an ability to put enough cash
B. Basic situations leading to a "seller carry back" financing
take place if he/she wants to invest into future cash receivable, or is
dealing with the family member, or carries it over as a part of a divorce
settlement, or is forced by certain circumstances, such as:
The seller needs to sell the house quickly
The buyer does not qualify for conventional financing
The buyer is unable or does not desire to put any cash down
Both parties wish to simplify this transaction without involving any third
"Seller carry back" financing can be facilitated by:
C. If the owner wishes to benefit from excluding brokerage fees he/she
may facilitate a FSBO option (For Sale By Owner). It could be "FSBO(Financing
Required)", or "FSBO (Financing Available)". Please note, that the "seller
carry back" financing may be facilitated regardless of whether he/she sells
through a real estate broker or "by owner".
Origination of the Real Estate Lien Note and Deed of Trust (home owner
responsibilities are to be carried out by the buyer)
Rent & Buy Contract (home owner responsibilities are to be carried
out by the seller)
Lease with Purchase Option Agreement (same as Rent & Buy Contract)
2. Benefits of the "seller carry back" financing
Since the seller and the buyer are the only two parties to reach an agreement
it is always a better chance to sell the house quickly
The seller remains in control of the situation with the property and debt
instruments. In a foreclosure situation the seller may repossess and resell
It is a good investment secured by real estate (average 9% annual interest
rate compared to 5.5% interest on a CD)
If the seller needs a lump sum of cash for any personal or business reason,
such cash may be received for the sale of a partial of future payments
receivable or the entire note
Creates a possibility to reduce closing costs at the time of a sale
There is three basic issues to be addressed before any decision can
be made on which option to chose and how to structure the sale:
1. Property considerations
A. Property description:
2. Sale considerations
The subject property shall demonstrate "pride of ownership", i.e. be
in a good condition. It is good to mention all improvements which have
been done since its purchase by the seller, if any. Detailed description
of the subject property, description of the subject area, and the particular
subdivision will also be necessary at the time of evaluation of the owner
financed note. Qualification of the subject property commanding a better
Investment-to-value ratio depends on whether it is:
B. Tax Appraised Value
Single Family Owner Occupied Residence (The best case)
Multiple Family Residence (Less attractive case)
Rental (The worst case)
For the primary evaluation of the owner financed note it is important
to know what is the recent tax appraised value of the subject property
(land + house). Tax appraised value does not represent a fair market value
of the property but at least shows its primary value.
C. Fair Market Value
Before any decision is made on the primary or secondary financing, or
refinancing, any lending institution or investor will calculate the risk
associated with this transaction. In addition to a credit rating of the
buyer (risk of foreclosure) it is necessary to determine a fair market
value (risk of loss of the funds provided by the lender or investor). "Drive-by"
appraisal of the subject property allows the lender or investor to evaluate
the note and collateral. In any situation the seller is strongly recommended
to order an appraisal before structuring the sale. Typical cost of the
drive-by appraisal is $210 to $280.
The seller is recommended to obtain title insurance policy covering
full value of the property before the sale takes place.
B. Sale with the use of conventional loan
The subject property is a single family owner occupied residence, is in
good condition and located in a good neighborhood.
Appraised value of the house and land is $40,000
Title is owned free and clear
No current liens on the property
All taxes and insurance policies are paid
Sale price is offered at the appraised value or $40,000
Loan to Value:
A credit 95% $2,000
Brokerage fee: $2,400
B credit 90% $4,000
C credit 80% $8,000(*) $32,000
(*) Usually the seller has to carry back a 2nd Lien Note because this
buyer does not have that much in cash to pay.
Closing costs: $2,500
Net cash to Seller: $35,100 minus cash required from the seller (**)
(**) A or B Down Payment does not pay brokerage fee and closing costs.
2nd Lien Note: $8,000
Net to Seller: $32,000
(The Seller pays brokerage fee and closing costs)
Net cash to Seller: $27,100 (Plus $8,000 receivable over the term of
the 2nd Lien Note at full risk)
2nd Lien Note represents a risk of foreclosure which the lender does
not want to carry and in case of foreclosure this money most likely will
be lost due to subordination to the 1st Lien Mortgage.
3. Financial considerations
C. Sale by owner may eliminate brokerage fee, reduce closing costs
(no loan origination costs), and allow to compromise sale price, down payment
and mortgage terms as further described. It creates a 1st Lien (senior)
A. Mortgage terms
1st Lien (B credit)
Since the buyer with C credit has to pay taxes, insurance premiums and
two mortgages the lender and seller will have to make sure that this buyer
can afford such payments. Balloon(s) can be used to reduce the monthly
payment, but the equity will not be growing up quickly enough to
improve the Loan-to-value ratio.
Date of the Loan: January 1, 1998
Amortization Term: 30 years or 360 months (typical)
Monthly Payment: $264.16 (calculated)
None (fully amortized note)
1st Lien (C credit) 2nd Lien (C credit)
B. Compromising sales and mortgage terms by owner financing the sale.
C. Other considerations.
$4,000 or 10%
Owner financed: $36,000
Mortgage terms: 1/1/98
1st Year receivable: $2,800 (at sale)
$276.81 per month
Balance after 1 year: $35,727.85 (for sale)
$3,321.72 (first 12 months)
Objectives to compromise sale price and mortgage terms:
The buyer does not pay the loan origination cost up front, so the seller
may ask for higher interest rate (9%, or 9.5%, or 10%).
The buyer does not have the money to put $4,000 down, so the seller may
ask for $2,000 down and may increase the face amount on the note by $2,000.
The buyer has C minus credit and does not have money to put down, so the
seller may try to increase the interest rate and/or face amount.
Adjusted sale price: $42,000
1st Year receivable: $800 (at sale)
$2,000 or 5%
Balance after 1 year: $39,753.34 (for sale)
$4,036.08 (first 12 months)
Origination of the 2nd Lien at a time of sale (conventional financing):
4. Transacting owner financed notes in the secondary market.
2nd Lien Note can not be sold if its balance is less than 50% of the 1st
Lien balance. Generally, only 50% of the 2nd Lien Note balance could be
recovered by sale in the secondary market.
The seller might consider a combination of the conventional loan of 30%
of the amount to be financed (1st Lien) and take back the 2nd which will
represent 70% of the owed principal balance. In case of foreclosure the
2nd Lien balance is partially recoverable. Generally, when the 2nd Lien
sells in the secondary market the investor pays off the 1st Lien and takes
control over the entire loan, which make the sale of this 2nd Lien more
The seller might consider borrowing, say 50% of the money against
the subject property, create a 1st Lien Note, and then create a Wraparound
Lien Note for 100% with the buyer (Full amount of the monthly payment is
receivable from the buyer, half of this amount is payable to the bank by
the seller). In this situation the seller remains in control over the foreclosure
situation as it is always an option to pay off the 1st Lien, repossess
and further resell the property. Generally, Wraparound Lien Note sells
Owner financed notes represent existing loans which may be sold to
the institutional investors. That is why instead of Loan-to-value ratio,
Investment-to-value ratio (ITV) is used.
Before any purchase quote can be provided by an investor the entire
evaluation process has to be completed. Typically, for the property described
above funding might be available in the amount of 85 - 88% of the outstanding
balance or appraised value whichever is less.
Typically, discount is ranging 10% (high equity) - 20% (low equity)
of the outstanding balance to be purchased. This discount includes all
costs and fees and seller receives net cash in the amount 80 to 90 cents
on the dollar, subject to a minimally reasonable outstanding balance.
See typical list of necessary documents and information.
Funds recoverable at the sale of the owner financed debt paper:
Cash at sale:
1 year collection:
Sale of the 2nd Lien balance of $7,757.61:
Cash at sale:
1 year collection:
Sale of the entire note (80 c on the dollar of Balance): $32,000
(Discount of the balance = $3,727.85 or 10%)
Example B (a)
Cash at sale:
1 year collection:
Sale of entire note (80c on the dollar of Fair MV)
(Discount of the balance = $7,753.34 or 20%)