When to Use Carryback Financing

Carryback financing—also known as a seller carryback—can be an effective way to sell your property to a buyer who is unable to obtain a traditional mortgage. In a seller carryback, the buyer and seller agree to terms, where the buyer promises to make payments at a specified interest rate for a certain period of time. The seller finances the purchase rather than a traditional bank. Not only can the seller find more buyers by offering to finance the purchase, they may also be able to bargain for a higher purchase price.

The buyer and seller have a lot of leeway to negotiate the terms of the financing. For example, the parties may agree to a five year seller carryback, which gives the borrower time to improve their credit. At the end of the five-year term, the borrower can seek a traditional mortgage. The buyer gets to acquire the home or commercial property without needing a mortgage right away, and the seller makes the sale.

The seller is essentially acting as the bank, and will have the right to foreclose if the buyer defaults on payments. Seller-financiers should be aware of their rights in the foreclosure process, including the fact that they may not able to go after a homebuyer for any deficiencies due to Arizona’s anti-deficiency statutes. The buyer may also declare bankruptcy, which could prevent foreclosure proceedings from taking place for months or years. All of these factors need to be considered before agreeing to a seller carryback.

Buyers who are using carryback financing are typically doing so because they cannot get a traditional mortgage, which means that the seller has to carefully assess the risk of a default. Sellers may wish to make their carryback loans shorter in order to minimize their exposure while still completing the sale and giving the buyer time to find another way to pay for the property.

Seller carryback financing comes with risks and benefits. Consult with a real estate attorney to draft an effective carryback financing agreement that accomplishes your objectives while also protecting you from potential risks.

Chernoff Law handles business and real estate litigation matters throughout Arizona. Contact us to discuss your case with an experienced real estate attorney.