To Carry or Not to Carry, That is the Question . . .

When higher end homes don’t sell for the price sellers want, it’s common for them to put their properties up for lease instead, and ‘wait the market out.’

Here’s an email I received recently:

“Hi Dawn,

I have a home in Illinois that I had for sale last summer that didn’t sell, so I finally put a lease-to-own person in.  The home is very large and nice.

Potential purchase price: $1,150,000  For 12 months “Buyer” is paying $4,500 a month of which $500 is added to a down payment credit at closing if there is one.

The $500 each month is nonrefundable.  I recently met with the buyers, and they are taking outstanding care of the home, and state over and over that they want to close at the end of 18 months.

I think they can get a mortgage, but think that they’ll be short on both a down and the total financing needed. He has stated that he might ask for a $200K second.

I actually have more than $1,150,000 in the home – more like $1,300,000 with pool and landscaping.  I have a $380K 1st and a $250K second.  Any suggestions on how to protect myself or proceed?”

This seller has a great win-win situation brewing.  Actually, he’s luckier than most, because the lease tenants already demonstrate pride of ownership, which decreases management costs and hassles, maintenance and repairs.  But, my guess, like his, is that the would-be buyers may have a harder time than they think getting traditional financing, even at 80% LTV (loan-to-value).  The seller decided to hire me as a consultant, and it comes down to a couple of potential strategies/scenarios.

He can wait and see how much of a loan they can get next year.

It may be easier, it may be harder.  Interest rates could remain steady, or they could be higher.  Once their traditional loan is in place, and if the lender will allow it, the seller can record a second trust deed for the difference between their down payment and the amount of their financing.  This is what most people think of when it comes to seller financing, and is probably the most common seller carry back transaction, but it’s not always the best.

A relatively small second ($200K is small relative to the $1.15mil purchase price) is not considered a good investment, and has little to no value on the secondary market.    Think of it like gambling . . . if you get the payments each month, you win!  If you don’t, you just walk away from the table and take your lumps.  But, you do get a hefty chunk of change up front and the loans in your name are paid off, clean and simple.

Alternatively, if the seller doesn’t need a lot of cash and is willing to leave his current (and attractive) financing in place, he can create an investment partnership with the would-be buyers that would provide more protections for everyone involved.  He could generate the highest possible monthly cash flow from the property, and provide the tenants with many of the benefits of ownership, such as mortgage interest write off, long before they’re on title.

Additionally, depending on just how much of a down payment the buyers have (and other variables) the seller may be able to retain a portion of any appreciation above and beyond the ‘strike price,’ of $1.15mil.

The vehicle for this type of arrangement would be the Title Holding (Land) Trust, which is based on the Illinois-type land trust that has been used for decades.

Always consult with your CPA, tax attorney and/or financial advisor before selling any real estate.

Dawn Rickabaugh is a real estate broker with expertise in seller financing and real estate notes.   HYPERLINK “http://www.NoteQueen.com” t “_blank” www.NoteQueen.com; 626.641.3931;  HYPERLINK “mailto:dawn@notequeen.com” t “_blank” dawn@notequeen.com

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