There have been more first time seller carryback transactions in the past few years than ever before. Tight lending standards, high unemployment, and poor credit are the primary reasons. Unfortunately, many sellers are unaware of the possible risks they face.
A real estate note is a promissory note. It is a promise to pay a debt. It is not a guarantee to pay that debt. The biggest risk the seller faces is that his buyer does not keep his promise – he stops making the required payment that the note calls for. Now what? If the buyer defaults, the seller will have to foreclose. No payments coming in, maybe a buyer who won’t leave, maybe no communication with the buyer, maybe a property in disrepair, maybe unpaid insurance and property taxes, maybe attorney expenses, maybe fix up expenses – the list is endless. How many first time holders of a seller carryback note have the internal fortitude and emotional wherewithal to deal with this issue?
Why would a buyer not keep his promise? Why would he stop paying? Well, maybe things were great when he bought the property, but after a while maybe he lost his job. Maybe he got sick. Maybe there was a death in his family and he inherited more financial responsibility. Maybe he had a business that was declining. Maybe he got divorced. The bottom line is that life gets in the way in an unexpected fashion. When it does, will you as a seller be prepared to deal with the consequences?
Notebuyers who have purchased hundreds or thousands of notes have experienced all these things. They are prepared for the unexpected, and typically have the financial and emotional stability to deal with these issues. Most first time holders of a seller carryback note are not!
DO NOT SELL YOUR PROPERTY WITH A SELLER CARRYBACK NOTE IF:
1. Your buyer has no downpayment.
2. Your buyer wants interest only payments for 3-5 years with a balloon at the end.
3. You can’t sleep at night wondering if the next payment will be made.
4. You are not prepared to deal with a disaster that your buyer faces.
5. Your buyer reneges on his promise to pay and you must foreclose.
