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Should You Use a Seller Carryback?

Jerry Norton

Aug 8, 2024

aerial photography of house and road

You found the perfect real estate investment — maybe by using Propwire’s industry leading search tools — great! 

After you’ve skip traced to find and contact the owner of the property, the next hurdle to jump is financing. 

The truth is that there are many ways to go about financing your real estate deal, ranging from a traditional mortgage, a blanket mortgage, using multiple mortgages, and even using OPM, or other people’s money.   

But there is another lesser known option where sellers can potentially earn a higher return by charging interest on the loan, and buyers can purchase the property without the lengthy process of applying for a traditional mortgage.

Ready to learn more about this creative financing option for real estate investors?

We’re talking about a seller carryback. 

In this article, we’ll break down everything you need to know about a seller carryback to help you decide if it’s right for you. 

What is Seller Carryback Financing?

Seller carryback financing, also known as seller financing or owner financing, is where the seller of a property lends money to the buyer instead of the buyer obtaining a traditional mortgage from a bank or lender. 

In this creative financing method, the seller becomes the lender and holds a mortgage or a trust deed on the property being sold.

This type of financing allows buyers who may not qualify for a bank loan or don't have the time to go through the lengthy process to still purchase the property.

Next, we'll take a look at it's advantages for both buyers and sellers.

Advantages of a Seller Carryback for Buyers

Flexibility in Financing Terms

One of the main advantages of seller carryback financing for buyers is the flexibility it offers. Buyers can negotiate the deal with the seller, including:

  • the interest rate 
  • repayment period
  • down payment

Lower Closing Costs

Traditional loans and mortgages come with fees like closing costs, but with seller carryback financing, buyers may be able to reduce these costs.

Because closing costs are 3-6% of the loan amount, this can equate to a big savings.

Faster Closing Process

That's right: seller carrybacks require less paperwork!

Obtaining financing from a traditional lender can be lengthy and time-consuming.

In contrast, seller carryback financing expedites the closing process by eliminating loan applications, credit checks, and other requirements associated with traditional mortgages.

Advantages of Seller Carryback Financing for Sellers

Potential for Higher Sale Price

By offering financing options to potential buyers, sellers can attract a much larger pool of interested parties who may be willing to pay more for the convenience and accessibility of seller financing.

Steady and Passive Income Stream

Mortgage payments made from the buyer provide a steady income stream that can provide financial security.

Retaining a Security Interest

By providing seller carryback financing, sellers retain a security interest in the property being sold.

What does this mean?

Well, in the event of buyer default, sellers have the option to take back the property and actually reclaim ownership.

That's right.

This provides an additional layer of protection for sellers and mitigates the risk associated with buyer default.

Tax Advantages

Capital gains can be a big bill to foot come tax season.

But with a seller carryback, sellers may be able to defer capital gains taxes on the sale of their property.

Risks of Seller Carryback Financing

While there's tremendous upside with a seller carryback, the real estate strategy is not without its risk. These include:

Buyer Default Risk

Let's say the buyer fails to make timely mortgage payments or defaults on the loan. If this happens, the seller may face financial and legal complications in recouping the remaining balance owed.

This is why, as a seller, it's critical to determine if the buyer can pay the total amount of the mortgage before signing on the dotted line.

Interest Rate Risks

Because interest rates can fluctuate, so it's critical to offer a buyer one that is fair today, and will be fair in the future.

Decreasing Property Value

There is always the chance that the property's value could decline over time, which could leave the seller with a loan balance that exceeds the property's current value, making it difficult to recoup their investment.

The Bottom Line: Seller Carryback

There's many benefits to seller carryback financing: Buyers can experience flexibility in financing terms, lower closing costs, and a faster closing process.

Sellers can experience a higher sale price, generate a steady income stream, and retain a security interest in the property.

But a seller carryback also comes with its share of risks, ranging from buyer default to interest rate increases, decreasing property value and more.

When funding your first or next real estate transaction, remember there are many ways to do it, a seller carryback being one option.

At the end of the day, focus on learning all of the real estate funding options available today so that you can make the best and most profitable decision.