I Need More Info On Carryback. Please Help
Hello,
I am in a deal to buy a 41 unit apt. building. The owner said she might be willing to do a carryback. Can anybody explain to me what a carryback is? Will lenders accept this as down payment or do they limt it? :-? I didn't want to ask her because I didn't want her to know that I didn't know as much about real estate as her. Thanks.
A carryback is when the seller holds a mortgage on the property you are buying in lieu of you putting the money down or financing it traditionally.
Sometimes the seller will hold the entire morrgage, (be in 1st lien or hold a first mortgage) and sometimes you can get good financing elsewhere for say 80% LTV and the seller holds a second mortgage. Many lenders will accept this as long as their LTV is at their max limit or below. (It's just like those 80-10-10 mortgages you hear about, you close on two loans one is first and one is a Home Equity Loan or line of credit that is a second mortgage).
Sounds like you've got a motivated seller - good luck and much success!
Thanks so much. So should I offer to make a set payment and and a set interest rate and term? I'm assuming she probably only wants to do this until I can refinance. She said that she had it appraised by an appraiser here in town and he appraised it at quite a bit more so I would have wiggle room. I don't know what she meant by that. If it aqppraises over the amount, do you think it would be realistic to ask for some money to put in new windows and carpet? That is, will mosts banks be OK with that or will I have to take out a separate loan later. Thanks Again!
Here’s what I suggest.
Don’t offer to make a set payment and don’t even raise the topic of interest rates. If the seller doesn’t say anything about it, have your attorney write it up as 0 interest mortgage. Try to get the longest possible term on your carryback. But even if all you’re able to get is 3 or 5 years, make sure the amortization is for a 30 yr mortgage. This way your monthly payments will be as if they were for a 30 yr mortgage. If the seller comes back and wants to set an interest rate, make sure that it isn’t higher then the going market rate. Judging from your first post, you intended to purchase this property with a down payment and traditional bank financing. This means that you probably have the down payment money available to you. If the seller decides that she wants to carry a 2 yr mortgage at some ridiculous rate of 12%, I’d think really hard about just going with a traditional purchase. Seller carrybacks are great, but only when they’re reasonable. Even at 6%, she’ll make a boatload of money during those two or whatever years just off the interest. Don’t let her get too greedy.
The wiggle room comment implies that the property is worth much more than the sale price, and you would therefore be able to possibly even secure a mortgage for more than you need to purchase the property, thereby putting some money back into your pocket. There are a number of approaches to doing this, but I won’t go into them here. I’m also not the most proficient person in these tactics. Search this site and ask a separate question specifically on this. It’s one of those things that can be very rewarding if done correctly, or if done incorrectly, can possibly constitute fraud and cause you endless amounts of trouble.
Finally, there are loans out there that are specifically designed for rehabbing or even just updating a property. Ask your lender about that.
Good luck.