What is seller carry back in real estate?

What is Seller Carry Back?

A seller carry back, or owner financing, is a real estate transaction where the seller provides financing to the buyer, bypassing traditional lenders. The terms, including interest rate and repayment schedule, are agreed upon by both parties, and the buyer typically signs a promissory note to the seller. This arrangement can benefit both parties by making the property more attractive and accessible, but it also carries risks like potential default by the buyer.

Here's how it generally works:

  1. Agreement Terms: The buyer and seller agree on the terms of the loan, which include the interest rate, repayment schedule, and the duration of the loan.
  2. Promissory Note: The buyer signs a promissory note to the seller, which is a legal document that outlines the buyer's promise to pay back the debt.
  3. Security Instrument: A security instrument, such as a deed of trust or mortgage, is used to secure the loan. This means that if the buyer fails to make the agreed payments, the seller has the right to foreclose on the property.
  4. Down Payment: The buyer usually makes a down payment to the seller, and the seller carry back covers the remaining balance of the purchase price.
  5. Interest Rate: The interest rate in seller financing can be either fixed or variable, and it's often higher than traditional bank rates.
  6. Balloon Payment: Many seller carry back agreements include a balloon payment, meaning that the full balance of the loan is due after a certain period, which could be several years. At this point, the buyer typically refinances with a traditional lender.

Seller carry back can be beneficial for both parties. For the seller, it can make the property more attractive to buyers, potentially sell faster, and provide a steady income stream from the interest payments. For the buyer, it can be an option when traditional financing is not available or desirable, and it often involves less stringent qualification criteria.

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