Creative Finance – Owner Finance or Seller Carry Back

 A great source of creative finance is owner finance or seller carry back. 

This is particularly true if the seller has equity in the property. Owner finance or seller carry back occurs when the seller agrees to provide you with a loan to help you purchase the property.

 You can get a loan for the full amount of the purchase price or a portion of the purchase price.

Usually you will need to get a new loan for most of the purchase price and then the seller will carry back a loan secured by a second mortgage or deed of trust. The new loan will pay off the seller’s existing mortgage and the owner finance covers the balance of the purchase price. 

It is surprisingly easy to get the seller to carry back some of the loan. The main reason is that the carry back loan usually represents profit to the seller gained by the increase in value to the home. It’s not money out the seller’s pocket.

Let’s use a practical example. 

The seller purchased his property her property for $120,000 in 1986. The original mortgage was for $96,000 and the current outstanding balance is $72,000. The property is now worth $198,000. 

In this type of example you could offer the seller $120,000 in cash or a new mortgage and then have the seller carry the balance of $78,000 as a second mortgage. 

The benefit to the seller is that the property is sold and the original mortgage loan is paid off. That’s no small matter in a down economy. The second mortgage also represents an annuity investment for the seller as the seller will get a monthly interest payment on the loan. 

The disadvantage to the seller is that she doesn’t immediately get all her money out of the deal and if the new buyer defaults on the loan the seller may be forced to foreclose on the property. This is expensive and time consuming and will result in the seller getting the house back. 

This technique works equally well in a bad market. It just looks a little different. 

In a case where the seller is unable to sell his property because it’s a slow market the seller can provide owner finance. Buyers who can not get a mortgage loan today will pay a premium for an owner finance house. If the buyer can’t get any loan then the seller can provide owner finance through a technique called a wraparound mortgage (wrap).

Ross Hair is the Real Estate Advocate and founder of eRealEstate.com, a social network for real estate investors and professionals.