A carryback sale is also known as:

• seller financing;
• an installment sale;
• a credit sale; and
• an owner-will-carry (OWC).

A seller who extends installment financing on the sale of their property for deferred payment of part of the sales price is offering a carryback sale.

Why would a seller offer carryback financing? The benefits to a seller include:

• not having to rely on lender financing to close the deal — especially if the agreed-upon price may not meet current appraisal requirements;
• appealing to a larger pool of buyers, including those who may not qualify for traditional mortgage financing;
• the likelihood of receiving an above market sales price, which is much harder to get when the homebuyer is reliant on traditional financing; and
• the ability to defer taxes on taxable profit from the sale, particularly helpful for long-time homeowners whose profits may exceed the principal residence profit exclusion amounts of $250,000 for each homeowner. [26 United States Code 121(b)]

However, there are risks for the seller, too.

The seller takes on the financial risks of a mortgage lender — without a banker’s resources or portfolio diversification to fall back on if the homebuyer defaults. Further, California is a nonrecourse state. Thus, when the homebuyer defaults the seller’s sole source of recovery is to foreclose on the property. The seller cannot collect any of the carryback debt by way of the defaulting buyer’s other assets. The exception to this rule is when the mortgage is subordinated to a construction loan or additionally secured by property other than the property sold. [Calif. Code of Civil Procedure §580b]

The carryback seller can screen for the ideal buyer candidate by reviewing the buyer’s:

• ability to pay and fulfill the obligations of the carryback note;
• relevant information about the prospective buyer’s identity, occupation, employment, income and credit data;
• existing and future loan obligations, including payment history and any pending bankruptcy; and
• credit information as disclosed on a credit application.

On the other side of the transaction, benefits to a homebuyer choosing to take advantage of seller carryback financing include:

• the flexibility to negotiate a down payment amount with the seller;
• competitive and negotiable interest rates;
• more flexible mortgage qualification standards; and
• none of the closing costs associated with traditional financing.

However, with these benefits homebuyers need to expect to pay an above market price for the seller’s home.

Future carryback trends are future interest rate trends

In the old days of rising interest rates, it was quite common to see OWC — owner will carry — on listings, a marketing tool to garner more buyer interest. Going forward, you can expect to see more OWC listings with the rise in interest rates and increased housing construction.

Carryback sales were last common during the era of rising interest rates, which lasted about three decades — from the 1950s through the early 1980s.