What Is a Carry Back Note? Flexible Financing in Real Estate

In today’s real estate market, finding the right way to finance a deal can be just as important as finding the right property. Traditional loans don’t work for every buyer or every seller. That’s why some investors are using creative financing options like the carry back note. This financing method helps buyers close deals and gives sellers more flexibility in how they sell.

Let’s break down what a carry back note is, how it works, and why it might be a smart option for your next real estate transaction.

What Is a Carry Back Note?

A carry back note is a type of seller financing. This means the seller acts like a lender and gives the buyer a loan to help purchase the property. Instead of going through a bank, the buyer makes payments directly to the seller.

This kind of financing is useful when buyers can’t qualify for a full traditional loan. It also gives both sides more control over the loan terms, like the interest rate, monthly payments, and length of the loan.

In real estate, this setup is sometimes called a seller carry back. It allows deals to move forward even when bank financing falls short.

How Does a Carry Back Note Work?

In a typical transaction, the buyer gets a loan from a bank and pays the rest in cash. But with a carry-back note, the seller agrees to “carry back” part of the purchase price as a loan.

Here’s how it usually works:

1. The buyer and seller agree on a price.
2. The buyer pays a portion using a bank loan or cash.
3. The seller finances the rest through a promissory note, which is a legal promise to pay.
4. The seller secures the loan with a mortgage or deed of trust, just like a bank would.
5. The buyer makes monthly payments to the seller until the loan is paid off.

This setup gives sellers a legal claim to the property if the buyer doesn’t pay, protecting their interests.

Example of a Carry Back Note

Let’s say a home is selling for $300,000.

• The buyer pays $50,000 in cash as a down payment.
• That leaves $250,000.

Instead of walking away, the seller agrees to finance that $250,000. The buyer signs a carry back note and agrees to monthly payments with interest. The deal closes, and the buyer moves in.

Why Use a Carry Back Note?

For Sellers:

• Attract More Buyers: Offering a flexible financing option opens the door to buyers who may not qualify for a full mortgage.
• Tax Benefits: Sellers may qualify for installment sale tax treatment, which spreads out the income over time.
• Potential for a Higher Price: Buyers may be willing to pay more if seller financing is available.

For Buyers:

• Easier Approval: Buyers with less-than-perfect credit or unusual income may still qualify.
• Custom Terms: Buyers and sellers can agree on terms that work for both sides.
• Lower Closing Costs: Fewer bank fees can make the deal more affordable upfront.

Learn how a pair of investors built a 68+ rental portfolio using creative financing in this episode of the DealMachine podcast below.

Risks and How to Handle Them

While there are benefits, there are also risks. Both buyers and sellers should take steps to protect themselves.

Seller Risks:

• Buyer Default: If the buyer stops paying, the seller may have to go through foreclosure to get the property back.
• Tied-Up Cash: Sellers don’t get the full sale amount upfront, which could affect their ability to invest elsewhere.

Buyer Risks:

• Higher Interest Rates: Seller financing may come with a higher rate than bank loans.
• Balloon Payments: Some carry-back notes require a large payment at the end of the loan term, which can be hard to plan for.

How to Protect Yourself:

• Sellers can ask for a larger down payment to lower risk.
• Both parties should clearly write out the loan terms in a legal agreement.
• It’s smart for both sides to talk to a real estate attorney or financial advisor before signing anything.

Legal and Financial Rules to Know

Seller financing, including carry back notes, is legal, but there are rules to follow. These deals must meet federal and state laws. These laws protect consumers and regulate who can offer financing.

Because of these rules, it’s important for both sides to work with professionals who understand the legal side of real estate transactions. A lawyer or licensed mortgage professional can make sure the deal is safe, fair, and legal.

Is a Carry Back Note Right for You?

If you're buying or selling property, a carry back note might offer the flexibility you need. It can be especially helpful in situations where:

• A buyer can’t qualify for a full bank loan
• A seller wants to attract more offers
• Both parties want to close a deal quickly
• The market is competitive, or interest rates are high

This financing method has been around for decades, and while it’s not for everyone, it remains a powerful option in creative real estate strategies.

Final Thoughts

A carry-back note can turn a complicated deal into a successful one. By using seller financing, buyers and sellers can create win-win solutions that might not be possible with traditional banks.

This method gives buyers a way to purchase when banks say no. It also gives sellers more control and potential long-term income. As long as both parties understand the risks and take the right steps, a carry-back note can be a smart move in real estate.

Before using this strategy, take the time to talk with legal and financial professionals. Their advice can help you avoid common mistakes and make sure the deal works for everyone.

Frequently Asked Questions (FAQs)

What is a carry-back note in real estate?

A carry-back note is a type of seller financing where the seller gives the buyer a loan to cover part of the home’s purchase price.

Is a carry-back note safe for sellers?

Yes, it can be safe if the agreement is done correctly. Sellers should require a clear loan contract, a down payment, and secure the loan with a mortgage or deed of trust. This helps protect the seller if the buyer stops making payments.

Why would a seller offer carry back financing?

Sellers may offer carry-back financing to attract more buyers, especially those who can’t get full bank loans. It also allows the seller to spread out their income over time and may help the property sell faster or at a higher price.

Can a carry-back note be combined with a bank loan?

Yes, this is common. A buyer may use a bank loan for most of the purchase price and ask the seller to carry back the remaining amount. This is often called a flexible financing option and helps close the gap when full funding isn’t available.