So, your property is on the market at
present and your Realtor has suggested that you should consider carrying
a second mortgage/trust deed to facilitate the sale. You have heard
the words "seller carry back" but, don’t understand the full implications.
Who determines the interest rate, who collects the payments, what
happens if the people stop making payments?
The seller carry back mortgage is
a tried and true method of facilitating the sale of your house. Due
to high interest rates, it was virtually impossible in the early 1980’s
to sell property without some form of seller carry back. Sometimes
the property was owned free and clear and the seller carried a first
mortgage or trust deed. Sometimes there was a first trust deed which
the buyer took over and the seller carried a second mortgage. During
those years, the more sophisticated sellers and Realtors used a document
called an All Inclusive Deed of Trust, more commonly referred to as
an AITD or wrap around. In any event, these were the seller carry
backs.
The question of determining interest
rate is fairly simple. This is a factor of down payment and credit.
If the buyer has 5% down and terrible credit, this is obviously very
risky. Frankly, if the buyer has 20% down and good credit they probably
wouldn't even need a seller carry back. The next question is how long
has the property been on the market and how motivated a seller are
you? In many areas of the country the seller needs to consider a seller
carry back in order to sell the property. Often the seller can achieve
a higher sale price by offering a seller carry back.
The interest rate is determined by
the buyer and seller. The buyer obviously wants to pay 5% interest
for 30 years; the seller usually wants 15% for 2 years. The "typical"
seller carry back might be 8%-12% with a period of 5-7 years. If this
is a second mortgage most first mortgage holders will require a minimum
of a 5 year term
Payments
on your carry back mortgage can be mailed directly to your address,
but this may not be a good idea. In the last 10-15 years, loan servicing
has become very tricky with requirements for the lender to report
interest paid by the borrower on both Federal and State tax forms.
Also,
late fee notifications, first mortgage delinquencies and fire insurance
concerns make this an area that should probably be handled by a professional.
In the 1970’s it was common for a savings and loan to collect a note
for either no fee or $2-5 per month; that was merely a "bookkeeping
service." The typical collection fee today might be $10-30 a month,
depending on the size of the note collected. It is very important
in the typical seller carry back to be firm on the collection of monthly
payments and be prepared to institute foreclosure proceedings quickly
if necessary (with sufficient equity). Your equity position (buyer’s
down payment and property appreciation) can be quickly eroded by non-payment
of taxes or payments to the underlying lender.
The
typical seller carry back situation is 10% down, 10% seller carry
back and 80% first mortgage. Obviously, this is a percentage of the
purchase price. To make it simple, a $100,000 house would have a $10,000
down payment, a $10,000 seller carry back and a $80,000 conventional
first mortgage deed.
