Report on Seller Carry Financing (Seller-Held Mortgages)

Source: www.REISkills.com

Subject: A comprehensive overview of seller carry financing, including its types, advantages, disadvantages, key document terms, and strategic considerations for investors.

1.0 Executive Summary

Seller Carry Financing, also known as a Seller-Held Mortgage or Trust Deed, is a creative financing strategy where the seller of a property acts as the bank, providing a loan to the buyer for a portion or all of the purchase price. This method is powerful for facilitating transactions when traditional bank financing is inaccessible or undesirable. While it offers significant advantages like flexibility and faster closings, it also carries risks such as due-on-sale clause violations and the need for foreclosure in case of default. Success hinges on proper documentation, understanding the motivations of both parties, and careful structuring of terms.

2.0 Types of Seller Carry Financing

The provided materials detail three primary structures:

2.1 Seller-Held Mortgage (First or Second Mortgage)

• Description: The seller extends a loan to the buyer, secured by a mortgage or deed of trust on the property. The title is transferred to the buyer at closing.
• First Mortgage: Used when the seller owns the property free-and-clear. This is less common.
• Second Mortgage: Very popular. Used when the buyer has a first mortgage from a bank but needs additional financing to cover the purchase price. The seller’s loan is in a second-lien position.

2.2 Wrap Around Mortgage (All-Inclusive Trust Deed)

• Description: Used when the seller has an existing mortgage they do not pay off. The seller creates a new, larger loan for the buyer that “wraps” around the existing underlying loan. The buyer makes a single payment to the seller, and the seller uses part of that payment to pay the underlying mortgage.
• Key Risk: Almost always violates the due-on-sale clause in the seller’s original mortgage, which gives the underlying lender the right to call the entire loan due.
• Buyer Risk: The buyer is dependent on the seller making the underlying payment. If the seller fails to pay, the underlying lender could foreclose.

2.3 Agreement for Deed (Contract for Deed)

• Description: The seller retains legal title while the buyer gets equitable title and the right to possession. The buyer makes payments directly to the seller over time, with title transferring only after the contract is fulfilled (e.g., a balloon payment is made).
• Advantage for Buyer: Easier to qualify for than a traditional mortgage.
• Disadvantage for Seller: The REISkills course strongly advises against selling using this method due to loss of tax benefits (depreciation, 1031 exchange eligibility), difficulty refinancing, and the requirement to foreclose (not just evict) if the buyer defaults. The recommended alternative when selling is a Lease Option.

3.0 Advantages of Seller Carry Financing

3.1 For the Buyer/Investor:

• Little or No Money Down: Motivated sellers may require a minimal down payment.
• No Credit Required: Qualification is based on the seller’s agreement, not strict bank underwriting (unless the seller requests a credit check).
• Off-Credit Report Debt: Seller-held mortgages typically do not report to credit bureaus, preserving the buyer’s debt-to-income ratio for other loans.
• Speedy Closings & Lower Costs: Avoids lengthy bank approvals and many traditional loan fees (origination, underwriting, etc.).
• Flexible Terms: Interest rate, term, and monthly payments are negotiable.

3.2 For the Seller:

• Faster Sale & More Buyers: Attracts a larger pool of buyers who cannot secure traditional financing.
• Maximize Selling Price: The financing concession can allow the seller to command a full asking price.
• Interest Income: The seller earns interest on the loan, often at a higher rate than they would get from a bank CD or savings account.
• Installment Sale Tax Benefits: Allows for potential tax deferral by spreading the capital gains tax liability over the life of the loan (consult a tax professional).
• Secure, Liquid Asset: The note is secured by the property. If the seller needs a lump sum, they can sell the note to an investor on the secondary market for cash.

4.0 Disadvantages and Risks of Seller Carry Financing

4.1 For the Buyer/Investor:

• Finding Motivated, Free-and-Clear Sellers: Finding sellers who own their property outright and are willing to accept payments can be challenging.
• Due-on-Sale Clause Violation: Wrap-around mortgages carry the risk of the underlying lender accelerating the loan.
• Seller Default Risk (Wraps): The buyer risks losing the property if the seller fails to make payments on the underlying loan.
• Closing Costs: The buyer may have to pay all closing costs, including title transfer and recording fees, especially if the seller is not receiving a large down payment.
• Balloon Payments: Many seller notes include a balloon payment, requiring the buyer to refinance or sell the property within a set period (e.g., 5-10 years).

4.2 For the Seller:

• Foreclosure Required: If the buyer defaults, the seller cannot simply evict; they must go through the costly and time-consuming foreclosure process.
• Carryback Risk: The seller assumes the risk of the buyer’s default.
• Illiquidity: The seller’s capital is tied up in the note unless they sell it on the secondary market, often at a discount.

5.0 Key Terms and Document Considerations

When drafting a Seller-Held Mortgage (using the provided FNMA-style documents as a base), the following terms are critical:

• Interest Rate: Should be at or slightly above market rate. A seller demanding a very high rate may not be truly motivated.
• Term (Amortization): Typically 15, 20, or 30 years (180, 240, or 360 months).
• Balloon Payment: A common feature where payments are amortized over a long term (e.g., 30 years) but the entire balance is due in a shorter period (e.g., 5-10 years). This gives the seller a lump-sum payout sooner.
• Due-on-Sale Clause (Paragraph 18 of Mortgage):
  • Buyer’s Goal: Always seek to remove this clause if you plan to assign or sell the property to another buyer before the note is paid off.
  • Negotiation Tactic: If the seller insists, negotiate for a one-time transfer right so you can sell the property to your end-buyer.
• Wrap Around Mortgage Rider: Must be attached to the mortgage if the seller’s underlying loan is not being paid off.
• Protective Measures for the Buyer:
  • Authorization to Release Mortgage Information: Allows the buyer to verify the seller is making payments on the underlying loan.
  • Collection Account Agreement: A third-party service collects the buyer’s payment, pays the underlying lender, and disburses the remainder to the seller, eliminating the risk of seller non-payment.
  • Additionally Insured: The buyer should be added to the seller’s hazard insurance policy.

6.0 Special Considerations

6.1 Seller Carry Back and 1031 Exchanges

• A seller can use a 1031 exchange to defer taxes and carry back a note, but it requires careful planning.
• The note must be made payable to the Qualified Intermediary (QI), not the seller directly, to be included in the exchange.
• To use the note to acquire a replacement property, the seller typically must contribute additional cash equal to the note’s value or sell the note (often at a discount). This adds complexity.

6.2 Monetized Installment Sales (A Word of Caution)

• This is a separate, advanced strategy mentioned in the context of tax planning.
• It involves selling to an intermediary for an installment note, then borrowing against that note for immediate cash, while deferring taxes.
• The IRS has identified this as a “listed transaction” and considers it potentially abusive. It carries a high risk of scrutiny and penalties.

7.0 Conclusion

Seller Carry Financing is a powerful tool in a real estate investor’s arsenal, enabling deals that would otherwise be impossible. Its successful execution depends on:

1. Finding the Right Seller: A motivated seller with significant equity or a free-and-clear property.
2. Structuring the Deal Correctly: Negotiating favorable terms like a long amortization, no due-on-sale clause, and a manageable balloon payment.
3. Using Proper Documentation: Employing standardized notes and mortgages, often through a title company, and adding specific riders and protective agreements as needed.
4. Understanding the Risks: Being aware of due-on-sale clauses, foreclosure procedures, and tax implications.

By mastering the concepts and documents outlined in this report, investors can effectively use seller carry financing to buy and sell properties, build wealth, and create win-win scenarios.

Report: Strategic Approaches to the Due-on-Sale Clause in Seller Carry Transactions

Subject: An analysis of two primary methods for managing the Due-on-Sale clause when implementing seller carry-back financing: the use of a Land Trust and direct negotiation with the loan servicer.

Executive Summary

The Due-on-Sale Clause is a standard provision in most mortgages that gives the lender the right to demand full repayment of the loan if the property is transferred without their consent. This presents a significant obstacle for Seller Carry-Back financing, as the property is being sold.

This report examines two distinct strategies to navigate this challenge:

1. The Land Trust Method: A strategic, non-recording method to obscure the change in beneficial ownership without formally transferring title, thereby avoiding the “trigger” that alerts the lender.
2. Direct Negotiation & Consent: A transparent, formal method of contacting the loan servicer to request a written waiver or “consent to assumption” for the seller carry-back transaction.

Neither method is without risk, and the choice depends on the investor’s goals, risk tolerance, and the specific lender’s policies.

Method 1: Utilizing a Land Trust

A Land Trust is an agreement where legal title to real estate is held by a “Trustee” for the benefit of the “Beneficiary.” The key feature is that the public record only shows the Trustee’s name, not the Beneficiary’s.

How It Works to Address Due-on-Sale:

1. Establish the Trust: The property owner (the original seller) creates a Land Trust, naming themselves as the initial Beneficiary and a trusted entity (e.g., an attorney, a title company, or a corporate entity they control) as the Trustee.
2. Deed to the Trustee: The seller executes a deed transferring the property’s legal title into the name of the Trust (e.g., “John Doe, as Trustee of the 123 Main Street Land Trust, dated October 26, 2023”). This deed is recorded.
3. Assign the Beneficial Interest: The seller then executes an Assignment of Beneficial Interest. This document transfers all the ownership rights and economic benefits of the property from the seller to the buyer. Crucially, this assignment is a private contract and is NOT recorded with the county.
4. Implement Seller Financing: The seller (now the former Beneficiary) and the buyer (the new Beneficiary) execute a Promissory Note and an Agreement for the Sale of the Beneficial Interest, which outlines the seller carry-back terms.

Advantages:

• Privacy: The buyer’s name does not appear on the public record, which is the primary record the lender monitors for due-on-sale triggers.
• Avoids Triggering the Clause: Since the recorded title remains in the name of the Trust’s Trustee, and the lender is often unaware of the change in Beneficiary, the due-on-sale clause is typically not activated.
• Streamlined Transfer: Future transfers can be done by assigning the beneficial interest again, without recording a new deed.

Disadvantages & Risks:

• Not a Guarantee: This is a strategic method, not a legal loophole. If the lender discovers the transfer of beneficial ownership, they may still have grounds to invoke the due-on-sale clause, arguing it constitutes a “sale or transfer of an interest in the property.”
• Potential for Fraud: The structure can be used unethically to conceal transactions from other creditors.
• Lender’s Rights Preserved: The Garn-St. Germain Act of 1982 explicitly allows certain transfers into a living trust where the borrower remains the beneficiary. It does not provide the same protection for transfers where the borrower gives up beneficial interest, as in this case.

Conclusion on Land Trusts:

This method is a widely used stealth approach. It relies on the lender’s lack of awareness rather than a legal victory. It is best employed with experienced legal counsel and with a clear understanding that it carries a latent, albeit often low-probability, risk of the loan being called due.

Method 2: Negotiate with the Loan Servicer for Permission

This is the most straightforward and legally secure method: asking the lender for permission.

How It Works:

1. Contact the Servicer: Identify and contact the “Loss Mitigation” or “Assumptions” department of the company that services the loan (this may not be the original lender).
2. Formal Written Request: Submit a formal, written request for a “Consent to Assumption” or a “Waiver of the Due-on-Sale Clause” in connection with a seller-financed installment sale.
3. Provide a Compelling Case: The request should be framed to demonstrate how the transaction is in the lender’s best interest. Key points to include:
   • Strong Buyer Qualifications: Provide the buyer’s credit report, financial statements, and proof of income to show they are as creditworthy as, or more than, the original borrower.
   • Maintained Loan Performance: Emphasize that the existing loan will continue to be paid on time. The seller can commit to having payments auto-debited or sent from a joint account to assure the lender.
   • Protection of Collateral: Argue that having a responsible owner-occupant in the property protects the collateral’s value better than a vacant property or one owned by a potentially distressed seller.
   • No Negative Impact: State that the lender’s position is unchanged; their lien remains in first position, and the loan terms are unaltered.
4. Be Prepared for Conditions/Fees: The lender may agree, but often with conditions:
   • Assumption Fee: A fee (often 1% of the loan balance) to process the assumption.
   • Interest Rate Adjustment: They may require the loan to be modified to the current market interest rate.
   • Buyer Qualification: Formal underwriting of the new buyer.

Advantages:

• Legal Certainty: Once you have written consent, the risk of the loan being called due is eliminated.
• Transparency: Builds a honest and professional relationship with the lender.
• Peace of Mind: Allows all parties to proceed with the transaction confidently.

Disadvantages & Risks:

• Can Be Denied: The lender has no legal obligation to agree. Many large, institutional lenders have policies against it.
• Time-Consuming: The process can take 30-90 days.
• Costly: Assumption fees and potential rate increases can make the transaction less attractive.
• Awakens the Lender: If the request is denied, the lender is now formally on notice that a sale is contemplated, which could lead them to monitor the property more closely.

Conclusion on Negotiation:

This is the low-risk, high-effort approach. It is the only method that provides a definitive solution. It is highly recommended for deals where the underlying loan has favorable terms that are worth preserving and where the buyer is well-qualified.

Comparative Analysis & Recommendation

Feature	Land Trust Strategy	Direct Negotiation Strategy
Primary Approach	Stealth & Privacy	Transparency & Consent
Legal Risk	Higher (Potential for enforcement)	Lower (With written consent)
Cost	Lower (Mainly legal/trust setup)	Potentially Higher (Fees, rate adjustment)
Timeframe	Relatively Fast	Slow (30-90 days)
Probability of Success	High in practice, but with inherent risk	Uncertain, but definitive if successful
Best For	Investors comfortable with strategic risk, properties with non-responsive lenders, or when lender denial is likely.	Risk-averse investors, transactions with strong buyer qualifications, and loans with highly favorable terms worth preserving.

Final Recommendation

1. Always Attempt Negotiation First: For any long-term hold strategy, the security of having the lender’s written consent is invaluable. Begin with a professional inquiry to the servicer to gauge their policy.
2. Use a Land Trust as a Contingency Plan: If the lender is unresponsive, has a clear policy against assumptions, or the deal’s timeline does not allow for a lengthy approval process, the Land Trust method is a well-established, though not ironclad, alternative.
3. Mandatory Step: Consult an Expert. Real estate laws and the enforceability of these strategies vary by state. Consult with a qualified real estate attorney experienced in creative financing and Land Trusts before implementing either strategy. They can help you structure the transaction correctly and fully understand the potential consequences.

create letter to loan servicer for consent to seller financing seller carry

Of course. Here is a professionally drafted letter you can adapt to request consent from your loan servicer for a seller carry-back financing arrangement.

Letter to Loan Servicer for Seller Carry

[Your Name] [Your Street Address] [Your City, State, Zip Code] [Your Phone Number] [Your Email Address] [Date]

Loan Servicing Department
[Loan Servicer Company Name] [Loan Servicer’s Street Address] [Loan Servicer’s City, State, Zip Code]

RE: Request for Consent to Installment Sale & Waiver of Due-on-Sale Clause

Loan Number: [Your Loan Number] Property Address: [Subject Property Address] Borrower(s): [Your Name(s)]

To Whom It May Concern:

I am the current borrower under the above-referenced mortgage loan. I am writing to formally request your consent for a proposed transfer of the subject property via an installment sale with seller financing (a “seller carry-back mortgage”). In connection with this request, I respectfully ask for a written waiver of the due-on-sale clause contained in the mortgage agreement.

This transaction has been structured to ensure the continued performance and security of the underlying loan. The key terms of the proposed sale are as follows:

• Purchase Price: $[Total Purchase Price]
• Seller Financing Note Amount: $[Amount of Seller Carry-Back Loan]
• Buyer’s Down Payment: $[Amount of Buyer’s Down Payment] ([Percentage]%)
• Proposed Interest Rate on Seller Note: [Interest Rate]%
• Term of Seller Note: [Number] years, amortized over [30] years.
• Buyer’s Proposed Monthly Payment (to me): $[Monthly Payment Amount]

This transaction is in the best interest of all parties, including your company, for the following reasons:

1. Continued Loan Performance: The existing first mortgage held by you will continue to be paid in a timely and current manner. I will maintain full responsibility for ensuring payments are made on or before the due date. The cash flow from the seller-financed note provides me with the specific funds to do so.
2. Strong Buyer Qualifications: The prospective buyer is a qualified individual who has been thoroughly vetted. They have provided a significant down payment, demonstrating their financial commitment. For your review, I have enclosed the following documents:
   • Buyer’s Credit Report
   • Buyer’s Loan Application (1003 Form)
   • Proof of Buyer’s Income and Employment
3. Protection of Collateral: The buyer intends to [occupy the property as their primary residence / maintain the property as a rental investment]. Having a responsible party in possession of the property ensures it will be well-maintained, preserving and potentially enhancing its value as your primary collateral.
4. No Impairment of Your Security: Your lien position will remain unchanged as the first-priority mortgage. The seller-financed note will be in a junior, second-lien position. The terms of your original loan will not be modified in any way.

This is not a request to assume the loan. I am seeking your consent to the sale and a waiver of the due-on-sale provision under these specific conditions. I am prepared to pay a reasonable processing fee for this consent and to discuss any conditions you may require to approve this request.

Please provide your written consent and inform me of the next steps and any associated fees. I can be reached at [Your Phone Number] or [Your Email Address] to answer any questions or provide further information.

Thank you for your prompt attention to this matter.

Sincerely,

__________________________
[Your Printed Name]

Enclosures:

• Buyer’s Credit Report
• Buyer’s Loan Application (1003)
• Proof of Buyer’s Income
• Preliminary HUD-1 Settlement Statement (if available)

Key Tips for Using This Letter:

1. Customize Thoroughly: Fill in all bracketed [ ] information accurately.
2. Be Professional: This formal tone demonstrates that you are a serious and responsible borrower.
3. Frame it to Their Benefit: The letter consistently emphasizes why this is good for the lender: continued payments and protected collateral.
4. Enclose Supporting Documents: Providing the buyer’s financials is critical. It shows you have done your due diligence and shifts the buyer from an “unknown risk” to a “known, qualified entity” in the lender’s eyes.
5. Send it Correctly: Send the letter via certified mail with a return receipt requested so you have proof of delivery. Keep a copy of everything for your records.
6. Follow Up: If you don’t hear back within 2-3 weeks, call the Loss Mitigation or Assumptions department to follow up on your request.

This letter provides a strong, professional foundation for your negotiation. Good luck.