Jul
22
Discount Mortgage Fundamentals
Real Estate Discounted Notes
Many people are not aware of the fact that a substantial number of Real Estate transactions are completed through seller carry backs. This is where the seller, rather than a bank or other institutional lender, provides the financing for the purchase. They do this through the carrying back of a note, which is secured by the property. Often times the seller will take a first lien, or priority position with respect to the property, although in some cases the seller has been forced to take a second lien position in order to help complete the transaction. Many of the purchasers who require seller financing are well qualified but have been unable to obtain institutional financing for a variety of reasons. This is particularly true in today’s economy where financial institutions have become increasingly stringent in providing financing to individuals.
The majority of these transactions are secured by residential properties; however, seller carry back financing is becoming more and more prevalent with multi-family and commercial properties. This is because institutional lenders have virtually stopped providing purchase money financing for such properties, even when they are well secured and the purchasers are highly qualified.
Over the past few years a secondary market has evolved for institutional investors who provide purchase money financing. Historically, these institutions were interested in holding the loan for the entire term, but as interest rates climbed in the late 70’s and early 80’s, these lenders suffered serious declines in the value of their loan portfolios because the yield on their loan was well below market. Accordingly, the financial industry has developed a secondary market for institutional lenders to resell their loans shortly after they are originated. This allowed them to avoid the financial risk of holding them on the long term basis, and it provided them with renewed funding for further lending.
Even with the evolution of a secondary market for the resale of purchase money loans made by institutional lenders, no organized secondary market has developed for seller carry back financing. In most cases, individuals holding paper would prefer to receive cash for their note, but they do not know how to accomplish this. Even those individuals who wanted to carry back the paper on a long term basis will have events that occur in their lives which might make it necessary, or desirable for them to sell their real estate discounted notes