Considering Holding an Owner Financed Second Mortgage? - Know the Risks and Rewards!
More and more sellers are being asked to carry-back a second mortgage for the buyer - especially with the banks still keeping a pretty tight reign on lending.
While seller financing can be a viable alternative to bank loans when it is the buyer's primary obligation or first lien, a second lien has considerably more risk.
If you are asked to owner finance a small second behind the buyers bank loan weigh your options carefully and be sure to ask yourself these questions:
Is this the only way the house will sell?
What if you lower the sale price? Will you still receive enough money?
Do you need the cash now? Are you ok getting payments over time instead?
What if the buyer does not make the payments? Are you prepared to foreclose on the property?
Is the property worth enough to make foreclosing on the second lien worthwhile since you will need to pay for the first mortgage?
Are you prepared to never get any of the money?
If you decide to carry back a second mortgage, make sure the buyers have good credit. Don't take anyone's word for it (that includes your Real Estate Agent). Ask to see a current credit report. You are carrying back the note (thereby extending the credit) and have the right to see the report.
Lastly, make the note fairly short term (two to five years) and be prepared to keep it until maturity. Selling a second mortgage to a note investor is unlikely to make sense. Most second mortgages, if purchased at all, will be for 20-cents to 50-cents on the dollar.
Owner carry-back second mortgages can be a great way to facilitate a sale and even potentially pick up a good return in the process. Just be aware of the risks before moving forward.
Fred Rewey is author of the book Winning the Cash Flow War (Wiley 2005). He is also co-founder of NoteInvestor.com, a free site created to educate people on how to buy, hold, and sell private mortgage notes.
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