Tips for Creating Seller Carryback 2nds
Seller Financing and Carrying back a 2nd
Seller financing can be a useful technique and facilitate a
faster sale of real estate, but it is not without risk. Carrying back a 2nd
or junior mortgage behind a third party senior loan has additional risks as
compared to carrying back a 1st mortgage.
Pitfalls and Risks of a Junior Seller Carryback 2nd
- Default of the senior note – If the borrower stops
making payments to the senior loan, you may not find out about it until many
months after the fact, once the senior lender begins foreclosure. At that
point, you will have to pay any arrears to the senior loan in order to stop
their foreclosure and begin your own foreclosure process. This is the biggest
risk, especially if you are not able to come up with the money to reinstate
the senior lien.
- Default on your note – you may have to begin foreclosure
and take the property back. This can be time consuming and expensive,
depending on your state foreclosure laws.
- Due on sale after foreclosure – after you take back the
property due to foreclosure, it often violates the due on sale clause of the
senior lien holder and they can begin foreclosure. It is not very common for a
senior lien holder to do this, and it is not something senior lien holders
usually watch for or even notice. But it is possible and does occur. This is
more likely if interest rates have risen.
- Unattractive senior terms, or senior has an adjustable
rate, high interest rate or senior is negatively amortized. These will all
contribute to higher default risks for the borrower.
Solutions and Tips for Junior Seller Carryback Notes:
- Wrap around mortgage AIDT – with this technique, the
borrower pays you, and you pay the senior lien holder. This is effective for
monitoring the status of senior loan payments. You always know when either is
late, and can react accordingly, and continue to pay the senior even if the
borrower has not paid you. This way you can begin foreclosure without the
- Carryback a 1st instead of a 2nd
- Safer although your sales proceeds will be smaller.
- Instead of carrying back a big first, consider splitting
it and carryback a 1st and a 2nd – this may give you
more options down the road to sell the senior note.
- Add Collateral – If the buyer has other real estate,
cross collateralizing the note always makes a note more secure, more is
better. This can be done with personal property also using UCC filings.
- Add guarantors / co-signers - cosigners may be more
willing to step up and make payments if the borrower defaults, since their
credit is on the line.
- Bigger down payment – gives you more equity protection.
- Request for Notice – by recording this document, the
senior loan will be obligated to notify you sooner in the event of a default
on the senior lien.
- Permission for Verification of Mortgage (VOM)– The
borrower of the senior mortgage has to give permission to you (the junior lien
holder) in order for a senior lien holder to release information to you. Get
this document signed and ready, in case you need it down the road.
- Call the Senior Lien holder periodically and get a
status of payments. This is commonly called a “Verification of Mortgage” (VOM).
- Make sure the buyer/borrower can afford the payments,
check their job, income, get a copy of their credit report and SSN#.
Other Tips for Carrying back a 2nd mortgage – Terms of the note
- Make sure your 2nd is due after the 1st
- Make your interest rate higher than the senior interest
rate – encourages borrower to pay your junior note first if they have extra
- Amortize the note – so that the balance decreases over
time, always safer than a balloon note.
- Have a hefty late payment penalty – maximum allowed by
law, to encourage on time payments.
If you still feel uncomfortable selling by carrying back a
junior 2nd mortgage, consider selling with a lease option or land
contract (AKA contract for deed) instead, until the buyer has a bigger down
payment. Also consider just leasing the property without an option to buy, with
the possible opportunity to buy when their financial situation is better.
It is recommended that you discuss these issues with a real
estate agent or attorney hired by you (not your buyer).
Also Read this Article:
Tips for Creating a Seller
Carry-back Real Estate Note
This information can be useful to:
Home Sellers, Home Buyers, Note Buyers,
Attorneys, Accountants, Financial Advisors, Real Estate Agents, Business
I am not an attorney, nor a tax accountant,
laws vary from state to state, and any legal advice implied by this paper should
be checked with an attorney and/or tax adviser in your state.
About the Author:
I am a real estate broker licensed in the
State of California as well as an investor of real estate and debt instruments.
We buy real estate notes and real estate contracts nationwide and make private
and hard money loans on real estate in California.
I hope you find this information useful, feel
free to contact me with any feedback, or if you are contemplating selling a real
PO Box 91472, San Diego, CA 92169
(619) 846-1550 voice
(815) 572-5600 fax
©Copyright 2006 JMAC Funding
Licensed by the California Department of Real Estate, DRE# 01440161