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Carryback Question

planders_99 profile photo
  • Monday, May 19, 2003 @ 11:14 PM EDT
  • 3 Comments

Hi Everyone,

I'm selling my house (part of my Jan. plan to get out of debt and get investing in RE).

I have a person offering full price, but he wants to do a 5 year carry back. Here are the numbers:

sales price 185,000
earnest $ 500
1st 156,825

2nd/carry back 27,675--15% for 5 years/repay at a 25 year schedule @ 6%

The buyer is selling an apt. building and intends to pay off the 27,675 in six months, but I don't want to end up carrying this for 5 years. He says he had to structure it for 5 years at the request of the 1st lender.

I'm inclined not to do, this so I can get out with all of my money now, but I'm wondering if I could do the deal and then sell the second.

My questions:

Can I sell the 2nd? If so, are the terms attractive (i.e. should I require 8.5% interest)? Are there costs or fees associated with selling notes?

As usual your comments and expertise is appreciated.

Thanks,

Pete
cool grin

Comments(3)

  • no photo
    rajwarrior29th April, 2003

    Okay, Pete, I'm not a professional note buyer, but I do know a little about it and financing, so here's my view on this.

    First, this deal gives you nothing. The buyer has nothing invested in the deal. What would make him want to stay. You also have nothing to put down on another property.

    Second, in my state (NC) a junior (or 2nd) lienholder cannot foreclose on a property unless it is prepared to pay, in full, the amount owed on the 1st mortgage. Are you prepared to do that if the buyer doesn't pay you as agreed?

    Third, yes you can sell a 2nd mortgage, but usually at a steep discount. The reason is because of problem #2 above, and equity. A 2nd usually holds the equity that would be eaten up in a foreclosure, so the 2nd lienholder is taking a big risk. I'd expect a discount of 50% or more on a 2nd mortgage, especially a "non-seasoned" note.

    If I wanted to do this, I would at least bump the interest rate. Most 1st mortgages are running 5-6%, so 8-10% or a 2nd would not be high.

    Good luck

    Roger

  • no photo
    planders_9929th April, 2003

    Roger,

    Thanks for the quick response. I told the buyer, I would not take the carryback. He wants the house, so he said he would talk to his lenders about a bridge loan or equivilent. If he falls through, then someone else will be along, as I have been getting a lot of inquiries. No worries.

    thanks,

    Pete

  • no photo
    knucs19th May, 2003

    Pete,

    Just a followup, for a 2nd to be marketable, it needs to be 50% of the 1st and there needs to be some equity on the place so if it defaults, the note holder has something of value to recoupe for their time and risk.

    Kelly - a novice(just out of the gate) note buyer

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