When the owner is willing to provide financing for the buyer of the property that he is looking to sell, he's offering an "owner carry" deal. Technically speaking, "owner carry" is short for an "owner carry-back mortgage," but the term can be used generically to refer to any type of seller financing. Regardless of the type of financing that the carrying owner plans to offer, owner financing can be advantageous for both sides in a deal.
Owner Carry Mortgages
When an owner carries back a mortgage, it works just like bank financing. The buyer purchases the property and receives both legal and equitable title. At the closing, the buyer also signs a promissory note promising to pay the owner back and a mortgage or trust deed that gives the owner a security interest in the property. In some transactions, the owner carries the entire first mortgage; in others, just a small portion as a second mortgage to allow the buyer to make a smaller down payment.
Contracts for Deed
The contract for deed, also known as an installment sale or a land contract, is another popular owner-financing structure. Under a contract for deed, the buyer gets equitable title, which means that she can do just about anything with the property as if she owned it, but the original owner retains the legal title to the property. The buyer and owner sign a contract that specifies the terms under which the buyer can earn the title to the property. After the buyer makes monthly payments for a set period of time and, in some cases, makes a large balloon payment, the owner gets paid off under the contract, and the legal title passes to the buyer.
The Buyer's Perspective
Owner-carry financing is usually a gift for a buyer. If it takes the place of a traditional mortgage, it offers lower closing costs, easier qualification and the potential for better terms and a lower down payment. Owner-carry second mortgages let buyers get control of a property with a lower down payment. When the owner carry is in the form of a mortgage, the buyer also gets all of the legal protections that she would get with a traditional loan from bank, because the loan is an actual mortgage. Contract for deed transactions, on the other hand, give buyers fewer protections.
The Seller's Perspective
Carrying back financing solves two problems for sellers. First, offering seller financing can make hard-to-sell properties easier to sell. Seller financing is particularly for properties that are challenging to finance through traditional sources. The other benefit of offering an owner carry is that it sets the owner up to receive a string of payments over time. This can help to defer tax liabilities while it puts money in the owner's pocket. In exchange for these benefits, the owner takes one large risk -- the risk that the buyer won't fulfill his obligations and that the property will have to be taken back.
- The Truth About Mortgage: Seller Carryback Financing
- REI Club: The Forgotten Owner Carry
- Jones and Watkins LLC: Beware the Contract for Deed
- Zillow. “What Is Seller Financing?” Accessed May 14, 2020.
- Trulia. “The Pros and Cons of Seller Financing.” Accessed May 14, 2020.
- United States Congress. "H.R.4173 - Dodd-Frank Wall Street Reform and Consumer Protection Act." Accessed May 14, 2020.
Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.