At times, property investors and owners must turn to seller carry-back financing as an inducement to sell their real estate. While there is risk for sellers, such financing can benefit them as well as the borrowers.
But just what is seller carry-back? Here is the power of seller carry back explained.
A primary challenge in real estate investing is nailing down funding for new acquisitions, particularly when the economy renders traditional mortgages more difficult to secure.
Enter seller carry-back financing, a sales option in which the seller of a property agrees to finance the investor’s property purchase. Listings that include “owner will carry,” or “seller financing available” refer to such financing.
The seller acts as the lender or bank and takes out a second mortgage on the property in question, on which the buyer or investor makes monthly payments in addition to payments made on their first mortgage.
Such financing can significantly benefit borrowers with credit scores that make them ineligible for traditional mortgages. Not only do carry-backs usually have more flexible terms, but because they also usually have shorter terms, borrowers may be able to secure bank refinancing at the term’s end.
Rather than making a monthly payment to a traditional lender, the buyer makes principal and interest payments to the seller, who acts as the bank and carries a mortgage on the property.
With such financing, sellers get payments spaced out over the loan’s term, rather than a lump-sum payment. The buyer only pays a portion of the property’s price with the seller financing the balance.
Terms are negotiable and are largely between the buyer and seller.
There are distinct advantages to seller carry-back, chiefly:
There are also potential advantages for home sellers:
What Does the Structure to a Seller Carry-Back Deal Look Like?
A seller carry-back structure can vary depending on the buyer and seller agreement. The buyer usually gets a first mortgage of 80 percent with a mortgage lender or large bank and puts down 10 percent.
After that, the buyer “carry backs” the 10 percent balance with the seller. In some cases, the seller carry-back will be just 5 percent or prospectively as much as 20 percent of the seller’s asking price.
The down payment amount and terms are negotiable between the buyer and seller. While terms can vary just as they would with a conventional lender loan, the rate on a seller carry-back can range between 8 and 15 percent.
Note that in seller carry-back transactions, the property serves as collateral for the promissory note.
For carry-back deals, the parties should generate a formal document that lays out the interest rate, terms, set monthly payments, loan amount, and a set time for when the loan must be paid off. The document should be notarized and taken care of by a title company or an escrow.
For example, a bank requires a 10 percent down payment on a property, but the borrower has just 5 percent. The additional 5 percent needed can come from the home seller.
In another illustration, Debra sought to buy a $1 million piece of real estate from Robert. Debra, though, had just $200,000. Rather than drop his price to $800,000, for which Debra could qualify, Robert offered Debra a seller carry-back loan on the property.
There is risk involved with seller carry-back as well as considerations to mull:
There are a myriad of ways to diversify one’s portfolio and potentially earn steady income, just as the sellers do in seller carry back.
One increasingly popular way is through “alternatives,” as in, alternatives to stocks and bonds. Because of their low correlation to volatile public markets, such asset classes can stabilize portfolios, help protect against inflation, and enhance returns.
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Such investments also serve another very important purpose: diversification. Investors who have a mix of holdings, both in class and type, have portfolios with overall mitigated risk. In other words, spreading investments across varying assets means the investor is less likely to sustain total loss due to a single negative market event.
Alternative investments can be a good way to help accomplish this.
Traditional portfolio asset allocation envisages a 60% public stock and 40% fixed income allocation. However, a more balanced 60/20/20 or 50/30/20 split, incorporating alternative assets, may make a portfolio less sensitive to public market short-term swings.
Real estate, private equity, venture capital, digital assets, precious metals and collectibles are among the asset classes deemed “alternative investments.” Broadly speaking, such investments tend to be less connected to public equity, and thus offer potential for diversification. Of course, like traditional investments, it is important to remember that alternatives also entail a degree of risk.
In some cases, this risk can be greater than that of traditional investments.
This is why these asset classes were traditionally accessible only to an exclusive base of wealthy individuals and institutional investors buying in at very high minimums — often between $500,000 and $1 million. These people were considered to be more capable of weathering losses of that magnitude, should the investments underperform.
However, Yieldstreet has opened a number of carefully curated alternative investment strategies to all investors. While the risk is still there, the company offers help in capitalizing on areas such as real estate, legal finance, art finance and structured notes — as well as a wide range of other unique alternative investments.
When called for, one way to skirt traditional lenders when seeking to finance an investment property is through seller carry-back, which has other advantages, including a possible flexible down payment.
Note, too, that there are other ways to diversify portfolios and potentially generate regular secondary income, and that is through alternatives.
Yieldstreet provides access to alternative investments previously reserved only for institutions and the ultra-wealthy. Our mission is to help millions of people generate $3 billion of income outside the traditional public markets by 2025. We are committed to making financial products more inclusive by creating a modern investment portfolio.