Definition of Owner Carry
- The term "owner carry" is used to describe any situation where the owner of a property is willing to finance all or part of the sale of the property for a buyer. This may also be referred to as a "seller carryback" or "OWC" (owner will carry) in property listings or classified ads. The terms of the sale can vary greatly and the loan can be used along with additional financing from any other source, including a commercial lender.
- Sellers who own their property outright, or have a large amount of equity in their real estate, can finance all or part of the loan for a buyer without having to seek permission from anyone. This can help them to attract more buyers, command a higher asking price, turn a fast sale, avoid some of the closing costs, and allow them to spread out their tax liability with an installment sale that extends payments over several years.
- Buyers can benefit from an owner carry deal by expanding their buying power so they face easier qualifying, especially if their credit is weak, and can negotiate better terms and an interest rate equal to or lower than an institutional lender and close quickly on the deal. They can also save on many of the closing costs associated with a bank loan.
- Be aware that some forms of owner carry financing skirt legalities and may put buyers and sellers in financial jeopardy. Some sellers with little or no equity in their their property will offer "wraparound" financing, meaning they are willing to sell the property with their original lender financing still in place, and offer a second owner carry loan to cover the difference in the sales price. For example, the new sales price is $150,000, the balance of the original bank loan is $125,000, so they will owner carry $25,000. A common clause in most loan contracts called the "due on sale" clause, however, states that if the home owner sells the property, the loan will be due and payable in full, making this kind of financing risky to both buyer and seller.
- When the seller lends the money to the buyer to purchase the property, the seller places a lien on the property. This is called a purchase money mortgage. The loan is also secured by a note. The seller's mortgage can be in first, second or third (or higher) place in the order of liens. The position of the lien is often determined by the amount of the loan compared with any other loans secured by the property. If the mortgage is in any place other than first place, it is considered a subordinate loan and therefore riskier to the lender.
- The terms of an owner carry loan can vary greatly depending on the needs of the buyer and seller. Either side may have the upper hand, depending upon current market conditions, but negotiating skills definitely play a key role in the final outcome. The duration of the loan could be as short as six months or as long as thirty years. Owner carry second loans often run only three to five years, with a balloon payment due at the end of the loan. Interest rates may be slightly higher than the current market, but then again, everything is negotiable.
- Unless you have extensive experience in writing contracts, rely on the services of a real estate attorney to help you draft an owner carry mortgage and note. Owners who offer to carry a loan for a buyer should do their due diligence and make sure the buyer is credit-worthy. This should include reviewing the buyer's credit reports, a copy of his last three years of income tax returns and at least six months of bank statements. The seller should also consider the buyer's income and other debt she is carrying. The seller/lender should take all things into consideration, including the buyer's employment and assets.