Seller carry back financing is when a seller acts as a bank for the buyer. The seller acts as a lender or the bank and carries a second mortgage on the property. The buyer pays every month. This works as a good option if selling your property has become difficult or the buyer can’t get full or partial financing. But there are some very important things to remember which if overlooked can make you lose money in a seller carry back. BGK Investments in California describe the major pitfalls sellers should avoid.
PITFALL 1: NOT CHECKING CREDIT
The past is an indicator of how someone would behave in the future. This is especially true in the world of money. The buyer’s credit report is a clear indicator of how they would pay on seller carry back. It would also determine how much an investor is willing to offer if the seller wishes to sell the note payments. BGK Investments, California help you with the forms that you can make the buyer fill so that you can access their credit information. Alternatively, you can ask the buyer to provide you their credit report. Avoid buyers with a credit score less than 650. In fact, 700 is the ideal cut-off.
PITFALL 2: NOT CHARGING ENOUGH INTEREST
It is important for sellers to understand the concept of net present value of money. Prices of everything escalate. What $100 can buy today, $100 would not be able to buy you tomorrow. When it comes to selling a mortgage note, an investor will obviously pay you more for a higher interest rate note. BGK Investments at California suggest that it is advisable to charge at least 2-4% above standard bank loan rate for a similar loan. Factors such as credit and down payment may hike the interest rate even higher.
PITFALL 3: LOW DOWN PAYMENT
The down payment determines how much equity a buyer has in the deal. The greater the equity, the less likely a buyer will default. Do not make the mistake of accepting a zero down payment like some sellers do. BGK Investments advise that you ask for a down payment of at least 10% to 20% at closing when it comes to seller carry back.
As a seller, you might not be able to find an ideal buyer that fulfills all the above requirements. In such cases, one condition can be used to compensate for the other, says Ben Keisari at BGK Investments, California. For example, a buyer with a lower credit score might be asked for a higher down payment and interest rate. People with good credit scores can get lower rates in a seller carry back.