When sellers carry back part of the financing, they are taking a risk of not getting the full value of their property. Many times this form of financing puts the seller in the position of holding a second mortgage on the property. This means that in a foreclosure situation they will be second after the bank to be paid.
Frequently, sellers will require that all payments be made through them when the carry back the financing. This way, they are assured of knowing when a default may be about to occur. This gives them the option of taking over the first mortgage before the property can be repossessed. In so doing, it may make their personal financial situation a little more precarious, but most sellers that are willing to carry a second on the mortgage have the cash available to make it float in an emergency.
It will normally cost the seller something to buyout the first mortgage besides the cost of the mortgage because the bank will charge paperwork fees. However, the seller now has the option to resell the property possibly for more than the original amount and make additional profit.
In some instances, the seller will require the buyer to make two payments. This will be made as a single payment to a company which will spit the payment and send the seller’s portion to them and the bank’s portion to them. This way, both notes are retired at the same time.
If the buyer is in a position of strong income but low cash, the carry back financing can replace the down payment. After a period of time, it is agreed that the buyer will pay off the seller’s part of the financing. This is done by lump sums at quarterly, semi-annual, or annual due dates. Less than 5 years is normal for this with a shorter time frame being preferred.