Q: My property is on the market at present and my Realtor has suggested that I should consider carrying a second trust deed to facilitate the sale. I have often heard the words "seller carry back" but, frankly, don’t understand the full implications. Who determines the interest rate, who collects the payments, what happens if the people stop making payments? My Realtor has been less than helpful other than saying, "It’s done all the time."

A: The seller carry back is a tried and true method of facilitating the sale of your house, exactly as your Realtor said. Due to high interest rates, it was virtually impossible in the early 1980’s to sell property without some form of seller carry back. Sometimes the property was owned free and clear and the seller carried a first trust deed. Sometimes there was a first trust deed which the buyer took over and the seller carried a second trust deed. During those years, the more sophisticated sellers and Realtors used a document called an All Inclusive Deed of Trust, more commonly referred to as an AITD or wrap around. In any event, these were the seller carry backs.

My favorite expression in life is "everything is relative." I have a similar expression, which is "water seeks its own level." Your question about risk is fairly simple. This is a factor of down payment and credit. If the buyer has 5% down and terrible credit, this is obviously very risky. Frankly, if the buyer has 20% down and good credit they won’t even need a seller carry back as regular rates are very low. The next question is how long has the property been on the market and how motivated a seller are you? In many areas of the country the seller needs to consider a seller carry back in order to sell the property. As I write this column today, you would not have to carry back a trust deed in Southern California (if you don’t want to), assuming your property is priced correctly. Often the seller can achieve a higher sale price by offering a seller carry back.

The interest rate is determined by the buyer and seller. The buyer obviously wants to pay 6% interest for 30 years; the seller usually wants 12% for 3 years. The "typical" seller carry back might be 8-10% with a period of 5 years. If this is a second trust deed, most first trust deed holders will require a minimum of a 5 year term.

Payments on your carry back can be mailed directly to your address, however in my opinion that is no longer a good idea. In the last 10-15 years, loan servicing has become very tricky with requirements for the lender to report interest paid by the borrower on both Federal and State tax forms.

Also, late fee notifications, first trust deed delinquencies and fire insurance concerns make this an area that should probably be handled by a professional. In the 1970’s it was common for a savings and loan to collect a note for either no fee or $2-5 per month; that was merely a "bookkeeping service." The typical collection fee today might be $10-30 a month, depending on the size of the note collected. It is very important in the typical seller carry back to be firm on the collection of monthly payments and be prepared to institute foreclosure proceedings quickly if necessary (with sufficient equity). Your equity position (buyer’s down payment and property appreciation) can be quickly eroded by non-payment of taxes or payments to the underlying lender.

The typical seller carry back situation is 10% down, 10% seller carry back and 80% first trust deed. Obviously, this is a percentage of the purchase price. To make it simple, a $200,000 house would have a $20,000 down payment, a $20,000 seller carry back and $160,000 conventional first trust deed.

Please remember the seller of a house has much more motivation to carry a second trust deed with a 10% down buyer than an outside lender. The lender would look at 90% loan to value ratio (LTV) as risky. Though this IS somewhat risky, the seller obviously wants to sell the house. In the event that you are offered a seller carry back deal and you wish to "cash out" instead of carrying back, your broker can arrange the sale (through escrow) of your seller carry back at a discount. The discount on this carry back may range from 15-40%, depending on the interest rate, term and down payment. If this is a single family (1-4 unit) property and a broker is involved, the broker will furnish you with a "Seller Financing Disclosure Statement," which will answer most of the questions that you have asked here.

Peter Rosenthal
VIP Trust Deed Company