How Seller Carryback Financing Can Benefit You
Whether you are a seasoned Commercial Real Estate investor or just beginning to create your investment portfolio, you most likely have heard of “seller carryback,” or “seller financing,” or “Owner Will Carry” (OWC). Simply put, seller carryback financing is owner-provided financing. The seller acts as the lender and collects monthly payments from the buyer. Here is why this financing option may be appealing for both buyers and sellers:
During the sale of the property, the buyer and seller sign a promissory note. In this note, the buyer promises to pay a specific amount of money, with a specific interest rate, for a specific duration of time. While this may sound like a typical mortgage, there is no bank involved in the transaction so therefore the buyer and seller can make mutually agreeable terms.
How does seller carryback benefit the buyer?
If you are a buyer who needs more flexibility, or wants to explore creative financing to acquire a property, seller carryback can be a good solution since you do not have to qualify for a mortgage, pay the closing costs or appraisal fees traditionally required with a bank loan. The seller carryback process tends to come with far fewer fees. You do generally pay higher interest rates until the negotiated term is over, but everything is negotiable. You and the seller can include clauses in the contract allowing you to seek traditional financing if your financial position or interest rates change. Then, the seller carryback agreement can be terminated, the seller gets their money, and you can go to a conventional loan or a portfolio loan if that suits you.
How does seller carryback benefit the seller?
If you are a seller who is struggling to sell your real estate, seller financing can make the property more appealing to buyers. Additionally, you may receive a higher sales price when offering private financing because buyers may not have other good financing options, due to credit or the number of properties in their portfolio. While you will not immediately earn money from the real estate sale, you will likely earn more money over time. The seller carryback can provide you with an income stream while eliminating the hassle of managing the property. If you are facing capital gains if you sell your property outright, you can defer the portion that is financed and save yourself some of the tax on the gain. You can require a down payment so that you have cash in your pocket as well. If the buyer defaults on their payments, you would foreclose and regain the property, which reduces your risk.
For both parties, having a well-structured contract is paramount to the success of this financing option. Each should consult with their attorney and CPA to ensure they are covering all of their bases before moving forward with seller carryback financing. Call Butler Apartment Group for an experienced commercial real estate broker well-versed in the unique details of seller carryback.
