Understanding Seller Carryback Financing

With the ongoing problem of purchasers not being able to find the full price for a house, incentives have been introduced by certain sellers to tempt their custom. These take the form of carryback financing, although in many parts of Europe, the name for this kind of financing is Rent to buy.

Effectively, what that means is that if a potential purchaser likes a house that is a little beyond their means but has a good credit history, a seller can make up an agreement with a lawyer, whereby they allow between 10 and 15 per cent of the house price to be paid in monthly installments over a set period of time, instead of having to find a Bank loan to cover the whole cost of the house purchase.

It’s a two sided benefit for seller and for the purchaser, since it means regular income from the investment for the seller, and benefit to the buyer in that they can then afford a better home more immediately. Checking out if the buyer can pay off both his loan to the Bank and the amount loaned by the seller is extremely important, since there is always an element of risk involved. Banks will check the value of a home, and also the purchaser’s ability to pay their monthly payments and in the event of non payment will be the first to be paid.

If the property market fails and house prices go down, this can be a risky method or incentive for the seller, although having a fixed period at a fixed monthly price drawn into the documentation, the debt will still stand, even if the home sells for less than anticipated, though they may have to wait for their money.

Many larger companies are seeing the benefits of incentives such as this in the sale of houses and the level of protection of seller depends upon the country where the home is situated. In France it is a legal requirement that all debts on a property are paid before the seller gets any money, and so the likelihood of the seller being paid, and the investment paying off, are much higher than in other countries. In the event of failure to pay, the debt collection agency can seize property belonging to the purchaser who has failed to meet their debts, or courts can be given access to their bank accounts until such time as the money has been paid.