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When Selling, Should I Carry the Loan?

January 26th, 2009 by Temple City Tribune

There are people wanting to purchase a property, but are ill prepared of doing so.  These buyers may have jobs with good incomes, but their choices of how to use their incomes did not allow for saving a down payment towards the purchase of a home.  If these are first time home buyers, there are programs where they could come in with as little as three-percent down, but the monthly payments may be higher than what they would have been able to obtain if they had a larger down payment.
For a seller, who is able to do so, carrying the mortgage could show a better return than placing the funds in a bank.  Where savings accounts are paying less than two-percent interest, financing a property could pay as much as six-percent.
The same may hold true for placing the money in a CD, where you could obtain as much as four-percent, possibly a little more, but it is still less than six-percent.
One additional advantage is that the seller may be facing capital gains on the sale and can defer that portion which is financed.  For some sellers, having a monthly income is more attractive then receiving all of the funds at one time.  No matter what the reasons may be, it is always best to discuss the alternatives with your tax advisor, accountant and family.
Like any investment, there could be drawbacks, such as the buyer defaulting on the loan. The seller would have to foreclose on the property, and that can be costly.  If the seller is carrying a second-loan, being in second position to the primary lender, it could even mean that the amount of the second position loan could be lost, if you are unwilling or unable to purchase the first from the primary lender; another good reason to discuss the possibility of carrying a loan with your advisors.
A seller should never consider carrying a mortgage or second-mortgage if they anticipate needing those funds within a relatively short time.  There are investors that like to purchase loans from sellers that are financing the sale of their properties.  But be assured that when these investors agree to purchase those loans they will not be paying the full value of the amount due, they will be expecting the seller to discount the loan.
Most buyers are looking for a thirty-year loan, as the monthly payments would be lower.  Interest rates are slightly higher for a thirty-year loan, and lower for a fifteen-year loan, but a seller could offer a buyer a thirty-year loan, due and payable in 5 – 10 or 15 years, and do so at the higher interest rate.  The first five years of a loan is very advantages to the seller as the monthly payment received is virtually all interest.  At the same time, the buyer could start to put monies aside so that when the loan does become due and payable they would be in a better position of obtaining a new loan from a traditional lender, meaning a bank.
For those that may be interested in more information about seller financing, simply give me a call or drop me an e-mail, and I will send you a one page information sheet, prepared by California Title Company, on what to look out for when carrying-back a mortgage.

Answering Those Questions:

Q) We own 40 acres that we leased out to a firm for a fish farm.  We received a letter stating that the fish farm was no longer profitable and that they (the tenant) were going to use the land for recyclable items.  Is that a good idea?
A) You need a good real estate attorney and you need him/her right now.  Converting the land may require certification, permits, etc from the county where the property is located.  This new project could affect everything from water contamination to health hazards. If anything happens, you, as well as the tenant, could be held responsible.  Advise your tenant that they are not to make any changes until you have had an attorney review the project, and that all the property clearances have been made.

Q) We are renting a house that has gone into foreclosure.   Caller advised us that we must vacate the property within 30 days.  We really need more time, is there anyway that we can get an extension?
A) It was my understanding that under such conditions, a tenant had thirty-days to vacate, but this past September 2008, the law was changed and the lender that had foreclosed must now give the tenant sixty-days.  Don’t expect to get any additional extensions, as there are numerous problems for the new property owner, one being insurance.

Q) We made an offer on a condominium that was being sold as a Short Sale.  The seller accepted the offer, but we now understand that higher offer has been received and that they are accepting that one.  We were in first position, shouldn’t we be the ones getting the property?
A) No!  The listing agent did the correct thing by presenting the second offer.  The mortgage holder would make the final decision and naturally they would accept the higher offer, or there could be some form of Counter Offer to both buyers.

Q) If there is a second loan on a property that is going into foreclosure, and is being offered for sale as a Short Sale, does the holder of the second lose out?
A) Not necessarily so.  The holder of the second will be in first position to purchase the property back.  There is more to it, but based on the amount owing the primary lender, purchasing the property back by the holder of the second, may not be to their advantage.

Louis Perlin CRS, GRI is a Syndicated Writer, Author, Professional Real Estate Witness and Mediator.  Lou can be reached at Marilyn Perlin Realtors, Inc., by calling (760) 327-8401 or by e-mail: mprltr@aol.com.

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