WHY HAVE SELLER FINANCING

More Sellers Holding Mortgages for Buyers

(May 22, 2006) -- Seller-held financing, known as take-back or owner-carry loans, are back.

This time it’s not because they help sellers afford homes in a high interest-rate environment, as they did in the 1980s, when 40 percent of all home sales used seller financing.

This time, it’s because take-back loans allow the seller to spread out the gain over a longer period and avoid paying a large capital gains bill on profits over $250,000 for an individual or $500,000 for a married couple.

"Any time you do a carry back, you're sheltering that principal amount from taxes until the year it's paid," Ratzlaff said. "You avoid some capital-gains tax by spreading it out."

It's an option most likely to appeal to retirees or people who have paid off their mortgages and want to receive steady income. If the current mortgage rate is 6.5 percent, the sellers could carry back at 6 percent – better than what they could earn at a bank.

Buyers also can benefit by getting financing at a lower rate without spending money for appraisals, fees and points.

Experts suggest having the seller-financing contract serviced by an agency that for a monthly fee will manage a seller's bookkeeping, tax records and late notices.