What It Means When the Seller ‘Carries Back a Second’

Special to The Times

Question: I don’t understand how “seller financing” and “carrying back a second mortgage” works. If the home is for sale, why would the seller want to take out an additional mortgage?

Answer: The home sales term “seller financing” means the seller helps finance the buyer’s purchase by loaning the buyer part of the seller’s equity, instead of receiving all cash from the buyer at the time of sale. Seller financing does not mean the seller takes out an additional mortgage before selling.

For example, a few years ago, I sold a rental house to my lease-option tenants. They made a $30,000 down payment (from their lease-option rent credit), obtained a new first mortgage from a bank at 8% interest, and I carried back a second mortgage for the balance of the sales price at 9% interest. They didn’t have to come up with any cash except for closing costs.

The happy result is that I received the cash from their new first mortgage that they obtained at a bank, and I have been receiving monthly payments, plus 9% interest, on my second mortgage ever since.

In other words, when I carried back that second mortgage for my buyers, I loaned my buyers part of my equity that I had in that house at the time of sale. I also created an excellent, safe investment for myself.

If they should default, I can foreclose and either get paid in full at the foreclosure sale or take back the house to sell it again for another profit. However, foreclosure is unlikely because the buyers now have built large equity in their home.

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Letters and comments to Robert J. Bruss, a San Francisco-area lawyer, author and real estate broker, may be sent to 251 Park Road, Burlingame, CA 94010. Bruss suggests consulting an attorney or tax advisor before making important real estate decisions.