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Subject:  Re: Sell Pricipal Residence; Carry Back Paper? Date:  4/3/2005  10:26 AM
Author:  FoolMeOnce Number:  45427 of 90528

BrerBear writes:

My question is: Has anyone else carried back the paper when selling their residence? Do's and don'ts? Really big regrets? Etc?

Carrying the financing is an important option to consider and can be a great idea for the right person under the right circumstances. It can also be a disaster. In most cases, I would recommend that your buyer has substantial equity in the deal to provide incentive not to default. I would also keep the financing short; i.e. due in 5 to 10 years. Whoever you finance should be qualified and determined to be an excellent credit risk. The papers should be drawn by an attorney to make sure you enjoy the benefits of all lender protections allowed in your state. Installment sales make more sense to me as a means of tax deferral and less sense on the sale of a personal residence.

The primary advantage is that you may be able to sell for a higher price by providing built-in owner financing. It is also nice to receive a stream of payments secured by valuable real estate.

Things to watch out for: A mortgage note is like a long-term callable bond. You are locked into the rate stated in the mortgage for the entire term. If interest rates go up, you are stuck with an under-performing asset. The borrower however, can refinance or pay off the note whenever he wants. This could result in you receiving a lump sum at an inopportune time to reinvest. If the borrower's equity is thin and he runs into financial difficulties (particularly in a bad real estate market) you could end up with the property back (also at an inopportune time). You could even find yourself under-collateralized with no way to completely recover. If the borrower declares bankruptcy, you may lose access to the payments as well as the principal for an extended period.

To summarize:

Qualify your borrower.
Require that your borrower have a substantial equity stake.
Keep it short.

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