Seller Financing (So-Called “Seller Cadrries”)
So-called “Seller Carries” are getting to be more common as landlords or empty nesters age and want out. The advantages, generally, are these:
– The Seller may get a slightly higher price.
– Although the interest on the note is taxable, it is additional income for the life of the note.
– It may enable a sale that would otherwise be difficult because of the Buyer’s position with a conventional lender.
Some rules of thumb if the Seller is to carry the entire loan:
– To protect the Seller, there should be a fairly good down payment, 20% minimum, 30% preferred.
– The Seller carried note must be secured by an immediately-recorded deed of trust.
– The Seller must be a named insured on both the fire/liability and the title insurance policies.
– The Buyer must provide full credit and employment history as well as references.
A bit easier if the Seller is carrying a note for partial value (say 10%), Buyer 10% down, bank 80%:
Same rules regarding a note and an immediately recorded deed of trust.
– Same rules about insurance: Seller must be completely covered
– Seller may not need so stringent a credit check since the lender is giving 80% L.T.V.
– The structure of the note/deed must be done using the CAR Form SFA (Seller Financing Addendum).
The Seller Financing Addendum
– The “originator” of the loan is supposed to prepare the SFA and, by definition, that is the Selling Broker/Agent.
– Few brokers, let alone agents, know of or how to complete an SFA; be certain the creator of the document knows what he/she is doing.
– If the Buyer has used a first deed loan as partial payment and the Seller’s note is a second, it must run for the life of the first (Dodd-Frank January 2014)
– The Selling Agent has an obligation to provide credit/income history, etc., Listing Agent is obligated to see that this is done!
The downside for the seller:
– The Buyer may not make the monthly payments
– The Buyer may default on the first loan to the bank
– The Buyer may fail to pay taxes or insurance premiums.
The upside for the seller:
– The payout over a term of years may favorably effect the Seller’s capital gain
– The majority of buyer/borrowers refinance within about seven years, so the note may not run to 30 years.
– The property has already been bought and 90% paid for; if compelled to foreclose, the Seller stands to make still further appreciation