Real Estate

Carryback Financing

Pitfalls of Real Estate Carrybacks

In real estate transactions it is not uncommon for a buyer to ask the seller to finance a portion of the purchase price via a promissory note secured by a second deed of trust against the property.

Where the property is residential real estate of two and one-half acres or less—a normal residential sale—special rules apply and the seller will have no right to sue to collect money due in the event of a default.

Under Arizona law, the seller’s sole remedy is to foreclose upon the property. The foreclosure process can be lengthy and, in the meantime, the seller must protect his interest by keeping prior encumbrances current. In effect, this amounts to giving the defaulting buyer free rent during the foreclosure process.

A seller can be in a very difficult spot where there is insufficient equity in the home or where the seller’s funds are insufficient to keep the prior encumbrances current. Each case must be analyzed on its merits, but where a seller can foresee no circumstances in which he or she would retake possession of the home, it may be a better practice to secure the carryback note with other property, if available, or to not secure it at all, thereby preserving the option to sue for collection in the event of a default.

To talk to an Arizona real estate attorney who is knowledgeable about carrybacks, please contact the law office of Platt & Westby.