Ask Phyllis!

Pros And Cons Of Seller Carry Backs

Dear Phyllis,

   I own an old Craftsman that needs a lot of work. Like many of these Craftsman homes, mine is partially on a brick foundation. The home has gone through numerous earthquakes without incident. Over the years, my electrician has asked that when I am ready to sell, I let him know because he wants to buy my house. Because of the brick foundation, he says it won’t qualify for a loan and he wants me to carry the note. He told me that he and his wife buy a lot of homes this way; they fix them and then sell them. I would love to save the real estate commission, but this is beginning to sound very complicated. I read your column each week and your advice always seems sound. What advice do you have for me?  

MK

Dear MK,

   I am glad that you enjoy my real estate question and answers and thank you for your question. Before I began selling real estate I worked for a bank. Banks make thousands of loans and by doing so they spread their risk.

Consider the following:

•   If your buyer stops making payments you will need to foreclose. This is a costly legal process which takes about four months. In the event the buyer fights the foreclosure, it could be much longer.

•   By the time you complete the foreclosure process, real estate values could be higher or they could be lower.

•   You mention that he and his wife want to fix your home and resell (flip).  The worst case scenario is that they will gut your home, prices will drop and they will stop making payments. By the time you foreclose the home could be in shambles.

   There is a lot of risk for you to finance the sale. If you were to do so, I suggest that you insist on a VERY large down payment. You should also hire a real estate attorney or a real estate agent to prepare the paperwork. A couple of other points:

•   If you were to list your home and expose it to thousands of real estate agents and other home buyers and investors you might sell your home for so much more than the electrician is willing to pay. This will likely offset any real estate commissions you pay.

•   I contacted three different lenders and the fact that you have a brick foundation does not necessarily mean that the home doesn’t qualify for financing.

  Phyllis Harb