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

Published by Diego Loya

Diego Loya is a Realtor - Broker at Home Living Real Estate Brokerage, a Orange County full services real estate company. Over the past 12 years, Diego has helped homeowners sell and buy their homes. He's loves educating and empowering real estate consumers. You can find him on Google, Facebook and Twitter.

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