Transfer of real property is documented through real estate notes and land contracts. These notes are also commonly referred to as seller carry back trust deeds and real estate receivables. Seller carry back references private financing provided by the property owner. This type of financing can be used when borrowers cannot obtain financing through a conventional lender.
Real estate notes and land contracts can be drafted by the note holder. However, it is strongly recommended to enlist the services of a real estate lawyer to ensure contracts are legally binding and contain legalese to cover both parties in the event of default.
Real estate receivables are valuable assets that can be exchanged or sold to other investors. It is crucial to be informed of various strategies that can maximize cash flow prior to executing legal contracts.
When sellers offer seller carry back financing they typically require a minimum down payment of 10-percent for residential properties and 20- to 30-percent for commercial real estate. Most sellers do not provide 100-percent financing. Instead, they carry back between 10- and 50-percent of the purchase price and buyers finance the balance through a mortgage lender.
Seller carry back financing is intended for short term use and real estate contracts typically extend between two and five years, or up to seven years for commercial properties. Once the contract expires, buyers must refinance mortgages through a conventional lender. It is best to keep seller carry back terms as short as possible to minimize risk of default.
The majority of buyers that require seller carry back financing are credit challenged. Therefore, sellers must conduct a credit check to determine if entering into a financial agreement is the best option.
The common rule of thumb is the lower the FICO score, the higher the risk. However, the point of offering seller carry back mortgages is to help buyers rebuild or establish credit so they can eventually refinance through a bank. In order to protect realty assets, sellers should conduct a thorough credit check, obtain sufficient down payment, and execute an iron-clad real estate contract.
When entering into real estate notes and land contract agreements it is best to work with buyers whose FICO score is 620 or higher. Buyers with credit scores below 600 are generally at a higher risk for default than those with a credit score of 700 or more. If buyers can remain current with mortgage payments and other creditor debts, they can improve their FICO score and clear derogatory credit histories within a year or two.
Seller carry back real estate notes and land contracts can be sold to private investors. Sellers who plan to sell notes should strive to work with buyers whose credit history falls into the low- to medium-risk category. Although real estate notes can be sold when buyers possess low FICO scores, investors offer less money to purchase the note.
Another important consideration of providing seller carry back financing for real estate notes and land contracts is sellers must comply with state usury laws. Sellers are required by law to assess lower interest rates than mortgage lenders. Usury laws regulate the amount of interest that can charged through private financing. Violation of usury laws is a criminal offense and punishable by jail time.