‘Owner Will Carry’ Financing Can Help Home Sellers, Buyers

Most of the homes that Granada Hills real estate broker John Nicsinger lists and markets these days are being advertised with three extra letters--OWC, or owner will carry. The letters OWC tell would-be buyers that they are being offered some financing by an owner willing to carry back a loan to the buyer.

“It’s a marketing tool,” said Nicsinger of Realty Network Inc. With the real estate market as depressed as it’s been, he said, sellers willing to offer a so-called “carry-back” have a better chance of selling their property. Nicsinger looks for sellers who have substantial equity in their homes that they don’t need to see all of immediately.

The sellers are then matched with buyers who typically would have trouble qualifying for a home loan with less than a 20% to 25% down payment. The advantage to the seller is being able to find a buyer more easily and collecting from the buyer a higher interest rate on the carry-back than what is offered on bank deposits.

The buyer has the opportunity to get into a home that might otherwise be out of reach because of problems with credit or finding enough of a down payment. Sometimes, the property has a mixed residential and commercial usage, for example, and is tough to obtain financing for, Nicsinger said.

The tough time that property sellers in the San Fernando Valley and Ventura County have been having seems to be making OWCs more popular. Seller financing is not without its risks, however. A seller who makes a second mortgage of $20,000, for example, on a property being sold for $200,000 and financed with a $170,000 first mortgage by a bank, could “easily be wiped out,” Nicsinger conceded.

If the property drops in value by 15%, all the buyer’s equity is lost, and the seller is left with no security. If the bank forecloses, the seller will be left with nothing--except the chance to sue the buyer, who may have no other assets. If the seller forecloses, the $170,000 first mortgage must still be paid to avoid being foreclosed on by the bank.

An OWC is not a transaction to be entered into lightly--especially for a seller, advised George Rosenberg, a Thousand Oaks real estate broker and the co-author of the book “Sell Your Property Fast: How to Take Back a Mortgage Without Being Taken.” Rosenberg has been advising clients about carry-backs for many years and he personally acquires properties and then sells them by lending money to the buyers.

To protect himself from being wiped out by a decline in the real estate market, Rosenberg usually makes first rather than second loans, and he frequently asks for additional collateral, such as the deed to another property or the pink slip to a buyer’s car or truck.

“Offering seller financing is one of the few ways to get your home sold today at a decent price,” Rosenberg said. Sellers should be very careful, though, he added. The buyer should be thoroughly checked out and personally interviewed. Rosenberg also avoids creating balloon loans on which the buyer is more likely to default.

The buyer should have plenty of equity in the property to protect the seller, Rosenberg said, and sellers should consider making a second mortgage only if they can service the first mortgage in case the borrower stops making payments on the first and second.

“If you don’t have the financial muscle to pay the first, you should stay away from making a second mortgage,” he said. “I want to be safe and secure.”

Sellers and buyers who are considering offering or seeking out seller financing need to consider many details before agreeing to make a deal. Some of the more important issues to consider include:

* How much financing is the seller willing to offer?

Sellers who follow Rosenberg’s advice and offer a first mortgage of about 70% of the property’s value are pretty rare. The more usual scenario is a seller who takes back a second mortgage of between 5% and 25% of the property value.

* What are the provisions of the promissory note?

When making a loan, it is essential to draw up a promissory note that details the relationship between the lender and the borrower. Items that need to be considered and negotiated include the interest rate, length of the loan, whether payments will involve interest and principal or interest only. Another item to include would be what’s known as a due-on-sale clause, which requires the borrower to repay the loan when the property is sold again. Real estate agents in the Valley and Ventura County report that most loans made by their sellers are balloon loans, usually due within five to seven years, with interest rates between 7% and 11%.

* Will a deed of trust be recorded?

A seller who acts as a lender on a first mortgage to a buyer/borrower will want to record a first deed of trust. If the seller is making a second mortgage, that seller will be in second position--behind the first lender’s deed of trust. Some sellers create what is known as an all-inclusive trust deed (AITD), also known as a “wrap-around loan,” or a “wrap.”

The way this may work is with a home sold for $200,000 with a $40,000 down payment paid to the seller. The seller would continue making payments on the seller’s own existing mortgage of $120,000 and take a second for $40,000. The seller continues to service the $120,000 loan and takes back the property if the buyer defaults. Because an AITD usually violates the provisions of the seller’s original promissory note, the seller and buyer should thoroughly consider the legal implications of an AITD before entering into such an arrangement.

* Who will service the loan?

Some sellers prefer to collect their own mortgage payments, others don’t. For a fee of as little as $5 a month, some banks will collect mortgage payments for a seller who is also a customer.

* How will the deal be structured?

Most lenders will consider the payment on the seller’s carry-back when they are determining how much of a monthly payment a borrower is qualified to make, and the lenders may reduce the amount of their loan when they know the seller is also lending money to the buyer. Some buyers write their offer in such a way that they receive their seller’s financing after the deal is consummated and without telling the first lender. While this is not an uncommon way to structure a deal, it is basically a form of fraud on the first lender.

* What about taxes?

Sellers are permitted to defer taxes on capital gains when they make an installment sale of their property. Sellers should check with their CPA to find out if they qualify for deferral of capital gains taxes.

* Does the seller need title insurance as a lender?

Title companies and other real estate professionals recommend that sellers making a loan should obtain a lender’s title insurance policy. More information about these policies is available through title companies and the California Land Title Assn. in Sacramento.

Selling a property is complicated--even without seller financing. Sellers and buyers who agree to a carry-back should carefully consider the implications of their transaction and seek out the appropriate legal and accounting advice before signing any papers. Rosenberg’s book about seller carry-backs is available by telephoning (805) 492-8120.