A seller carry back is a type of financing provided by the owner which is why it is also advertised as seller financing or owner will carry (OWC). In this type of financial arrangement, the seller or homeowner will “carry back” the note on their own house on behalf of a qualified buyer who has trouble obtaining a mortgage. This is also one way to attract enough buyers to purchase the property.
How a seller carry back works
The seller and buyer sign a promissory note that indicates a specific amount of money that a buyer promises to pay along with a specific interest within a specific period of time. This works similar to a mortgage except that the payment is made to the seller and not to the lender or bank.
Upon completion of the promissory note, the seller moves out and transfers the title of the property to the buyer. The seller then holds the note and collects monthly payments. In the event that the buyer defaults or stops making monthly payments, the seller can legally take back or foreclose the property.
The seller then has the option to sell the property in a traditional way or in another round of carry back.
Advantages of a seller carry back loan
- Suitable for buyers that have been denied a traditional mortgage.
- Has lower overall costs compared to a regular mortgage, what with many sellers willing to absorb some of the related purchase and financing costs.
- The interest rate is negotiable, depending on what the seller and buyer have agreed on.
Disadvantages of a seller carry back loan
- Comes with a balloon payment that is usually due within 5 to 10 years. This puts a buyer at risk if they still don’t qualify for traditional financing when the balloon payment is due.
- Some sellers offer seller financing because there is an issue with the property, resulting in lenders refusing to offer financing for the property in question.