Hey I used to live in MD, still come down quite often :-D
Anyway, this is a form of owner financing. Let's say your buyer is buying your 100K house. They want to avoid PMI and need to put 20% down. They only have 10K to put toward the house. They ask you (the seller) to carry back a note for the remaining 10K thereby dodging the PMI bullet.
The terms of the carry back note are negotiable - interest rate, term, balloon, etc., etc.
There are many other scenarios - it's usually used as a means to increase the appeal of the home.
Carrying back paper means that you are acting as a "lender" by agreeing to participate in the financing of your own property. It generally is done when the property is overpriced or difficult to sell.
You need to seek legal advice because there are a number of traps you can fall into with out legal guidence.
Sammy, please expand on the legal traps. Are you referring to not complying with RESPA and the required documents if you carry back paper more than 5 times per year?
There are also usury laws to comply with, and those vary state by state, as far as the max rate that can be set. Also, you cannot set these up with recourse to the seller if you are going to sell the note if it is seasoned or if it a new note via simultaneous close. Setting a note up with recourse means that if the buyer defaults, then the seller is in the hook. I know John Merchant knows ALL about this issue.
Also, the discount in purchase must be borne by the seller, not the buyer. Otherwise the increase in yield can easily put you into the realm of usury.
Any other legal traps? It's all about due diligence for sure...
Hey I used to live in MD, still come down quite often :-D
Anyway, this is a form of owner financing. Let's say your buyer is buying your 100K house. They want to avoid PMI and need to put 20% down. They only have 10K to put toward the house. They ask you (the seller) to carry back a note for the remaining 10K thereby dodging the PMI bullet.
The terms of the carry back note are negotiable - interest rate, term, balloon, etc., etc.
There are many other scenarios - it's usually used as a means to increase the appeal of the home.
Roger
Carrying back paper means that you are acting as a "lender" by agreeing to participate in the financing of your own property. It generally is done when the property is overpriced or difficult to sell.
You need to seek legal advice because there are a number of traps you can fall into with out legal guidence.
great info, look behind the obvious,
Sammy, please expand on the legal traps. Are you referring to not complying with RESPA and the required documents if you carry back paper more than 5 times per year?
There are also usury laws to comply with, and those vary state by state, as far as the max rate that can be set. Also, you cannot set these up with recourse to the seller if you are going to sell the note if it is seasoned or if it a new note via simultaneous close. Setting a note up with recourse means that if the buyer defaults, then the seller is in the hook. I know John Merchant knows ALL about this issue.
Also, the discount in purchase must be borne by the seller, not the buyer. Otherwise the increase in yield can easily put you into the realm of usury.
Any other legal traps? It's all about due diligence for sure...