This is the third in a series describing the various types of real estate loans. Whether you have excellent credit or no credit, whether you’ve saved for a down payment or you can’t rub two nickels together, there’s a loan for you.
Seller Carry Backs – For seller carry backs, the seller agrees to provide financing, usually when the buyer cannot secure a loan or the interest rate for that loan would be prohibitively high. The other reason for seller carry backs is that the seller may want to take advantage of tax benefits through an installment sale. In this case, the seller pays taxes on a portion of the down payment and a portion of the principal part of the monthly payment as well as on all the interest—far less than if the property had sold using a more conventional loan and the seller received payment for the full value of the property all at once.
A seller carry back is completely flexible on terms: it can be short-term or long-term, have a variable or fixed-rate, be interest only with balloon or fully amortized, and it can include any size down payment, especially when secured by the property changing hands plus other assets. It’s all up for negotiation .
Bank of Mom and Dad – This is one of my favorites. Sometimes the very best lenders are the ones you’ve known your whole life. The Bank of Mom and Dad (or Grandma and Grandpa) refers to the wonderful practice of someone who loves you lending you all or part of the purchase price, sometimes as a junior loan behind a more conventional loan. The great thing about a loan from a loved one is that it’s easy to qualify for and the payments can be tailored to meet the borrower’s needs.
This type of loan can be used as an estate-planning tool. Mom and Dad can forgive a little bit of the principal each year, avoiding gift and inheritance tax. It can also be used as an investment vehicle for Mom and Dad. If their savings has been in certificates of deposits earning 1-2 percent, it’s better to lend you the money to buy a house at 4 percent. It’s a deal for them and you. The downside is that if payments aren’t made, it’s really hard to foreclose on Junior.
Silent Loans – A silent loan, often called a “silent second,” is frequently an unrecorded loan that puts the first lender at higher risk. This is a close cousin to the Bank of Mom and Dad, where down payments can be borrowed and no payments are due for an extended period of time.
A silent second that is hidden from the first lender has a specific title. It’s called fraud. That’s because lenders, quite reasonably, want to know the borrowers’ total monthly obligation.
Economic Development Finance Corporation (EDFC) – This is a local lender with a specific mission: to lend money to encourage business development, either helping an existing business expand or helping a new business get started. Typically, these loans have a higher interest rate than standard commercial loans. Companies often turn to EDFC when they cannot get a bank loan.
Equity Share – These are complex loan agreements where the lender allows a higher loan-to-value ratio or lower interest rate, or supplies part of the down payment, in return for a portion of the appreciation of the property over time. This was very popular when interest rates were higher. Although the borrower loses out on some of the benefits of home ownership (realizing the property’s full appreciation), if the borrower would not have been able to purchase the property without this type of loan, then it’s worth it.
If you have questions about real estate or property management, please contact me at rselzer@selzerrealty.com or call (707) 462-4000. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 40 years.