Buyers Are Doing Something They HAven't Done in Years
June 3, 2009
It is a little bit "Deja Vu" in the world of real estate financing. Buyers are submitting offers asking the Seller to carry back a note secured by a first or second deed of trust. They are also writing offers with "wraparound financing".
Probably the request for financing from the seller is related to the change in the institutional lending market where second deeds of trust or purchase equity loans have become extremely difficult to obtain. Of course, requesting a seller to carry back a note assumes that the seller has enough equity in the property to be able to do so.
a "wraparound" mortgage" does not necessarily have this requirement. However, it still probably does. Here is how a wraparound works. The property sells for $450,000. The seller owes $350,000. The buyer puts some amount as a down payment - say $10,000. The seller then takes back a mortgage in the amount of $440,000. Your existing mortgage is at an interest rate of 4.5%. The new wrap around mortgage is at 6%. The buyer pays you 6% on the $440,000. The title transfers to the buyer and you no longer own the property but are still liable for the underlying deed of trust of $350,000. You are obligated to continue making the payments on this first mortgage as it remains in your name. There are a number of risks in this type of financing for both the buyer and the seller.
If you as a seller are able and willing to help the buyer with financing, carrying back a note secured by a second deed of trust takes you out of the obligation to the first trust deed holder.
In any instance of seller financing, the seller must be aware that should the buyer default on the sellers note or on the first trust deed, the seller's recourse is to foreclose and take back the property.
One question I might ask if I were the seller when a buyer asks me to help with the financing is "Why?" With interest rates at historic lows, why would a buyer not want to take advantage of the current rates? Perhaps in the case of a request for secondary financing, it is to be able to obtain an 80% loan to value first and have a smaller loan to pay off more quickly. It is important that both buyers and sellers have agents who are knowledgeable in the pluses and minuses of seller financing.
It is a little bit "Deja Vu" in the world of real estate financing. Buyers are submitting offers asking the Seller to carry back a note secured by a first or second deed of trust. They are also writing offers with "wraparound financing".
Probably the request for financing from the seller is related to the change in the institutional lending market where second deeds of trust or purchase equity loans have become extremely difficult to obtain. Of course, requesting a seller to carry back a note assumes that the seller has enough equity in the property to be able to do so.
a "wraparound" mortgage" does not necessarily have this requirement. However, it still probably does. Here is how a wraparound works. The property sells for $450,000. The seller owes $350,000. The buyer puts some amount as a down payment - say $10,000. The seller then takes back a mortgage in the amount of $440,000. Your existing mortgage is at an interest rate of 4.5%. The new wrap around mortgage is at 6%. The buyer pays you 6% on the $440,000. The title transfers to the buyer and you no longer own the property but are still liable for the underlying deed of trust of $350,000. You are obligated to continue making the payments on this first mortgage as it remains in your name. There are a number of risks in this type of financing for both the buyer and the seller.
If you as a seller are able and willing to help the buyer with financing, carrying back a note secured by a second deed of trust takes you out of the obligation to the first trust deed holder.
In any instance of seller financing, the seller must be aware that should the buyer default on the sellers note or on the first trust deed, the seller's recourse is to foreclose and take back the property.
One question I might ask if I were the seller when a buyer asks me to help with the financing is "Why?" With interest rates at historic lows, why would a buyer not want to take advantage of the current rates? Perhaps in the case of a request for secondary financing, it is to be able to obtain an 80% loan to value first and have a smaller loan to pay off more quickly. It is important that both buyers and sellers have agents who are knowledgeable in the pluses and minuses of seller financing.
posted by shirley harry at 9:14 AM
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