Using Real Estate Notes and Land Contracts with Seller Carry Back Mortgages

Real estate notes and land contracts are legally binding documents used to record the sale of property. Also referred to as real estate receivables, these notes are often used with seller carry back trust deeds; a form of financing provided by the seller.

When seller carry back financing is implemented, real estate notes and land contracts should be drafted by a real estate lawyer. At minimum, an attorney should review realty documents to ensure they are legally binding and include legalese to protect both buyer and seller in the event either party defaults on the agreement.

Real estate investors who purchase land contracts for deed should become familiar with strategies that can maximize return on investment. Real estate receivables are a valuable asset that can be used to obtain additional investment funds by selling all or part of the note.

Sellers who offer private financing for real estate purchases must abide by state and federal real estate laws. When using seller carry back mortgages buyers typically provide a minimum 10-percent down payment for residential properties and 20- to 30-percent toward commercial real estate purchases.

Sellers can carry back all or part of the financing; however, the majority provides a maximum of 50-percent financing and require buyers to obtain funding for the balance through a mortgage lender.

In some cases, sellers carry back 100-percent of financing for a short duration to allow buyers time to establish or improve their credit history and FICO score. Terms of land contract and real estate loans generally range between one and five years.

Sellers who provide real estate financing should work with buyers who possess a FICO score of 600 or more. This is of particular importance if planning to sell land contract loans to a real estate investor later on.

Buyers that seek out seller carry back financing are usually credit challenged. When sellers provide short term private financing they grant buyers the opportunity to eliminate derogatory debts. However, they can also encounter collection challenges that can lead to costly legal fees.

Individuals who possess credit scores below 600 are typically a higher financial risk than those with a score of 650 or more. When real estate investors review land contract financing notes, careful consideration is given to risk factors and loan viability. While real estate notes can be sold when buyers have low credit scores, investors generally offer less money to purchase the notes receivable.

Another important consideration when offering privately financed real estate notes and land contracts is to comply with state usury laws. These laws regulate the amount of interest charged against private loans. Most states require private parties to charge lower interest rates than commercial lenders. Charging higher interest rates is a criminal offense, so be certain to understand usury laws and lending limits. Finance regulations can be obtained at www.UsuryLaw.com.