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This review originally appeared in Real Estate investor’s Monthly.

Owner Will Carry by Bill Broadbent and George Rosenberg

Owner Will Carry was written by real-estate brokers. It was published by Creative Solutions, Inc. It also mentions Creative Real Estate, Inc. My Real Estate B.S. Artist Detection CheckList (www .johntreed.com/BSchecklist.html) says, "The following words seem neutral, but for some reason they are used especially heavily by B.S. artists. Be suspicious of anyone who uses these words a lot or uses one very prominently, like in the name of their company or product." "Creative" is one of those words.

Agents' perspective

The perspective of the book is that of agents who see sellers taking back mortgages as a way to increase the number of persons willing to buy the property in question. That's correct, but one should consider who those additional buyers are. The only people who care about seller financing are those who cannot qualify for an institutional loan or who want better terms than a competently-originated loan.

I can see why agents wouldn't care about the distinction. They aren't the ones taking back the mortgage. But sellers, who are the ones who take back the mortgage, should not be very eager to seek offers from people who cannot qualify for an institutional mortgage or offer below-market terms.

Goose and gander

If an agent takes a listing with a cash sale price, then asks you to take back a mortgage, the agent should get his commission on the exact same terms as you get your equity. For example, if the agent urges the seller to take back a seven-year mortgage for 40% of his equity, the agent should do the same regarding his commission. Furthermore, the seller's obligation to make the installment payments to the agent should be contingent on his receipt of the payments from the buyer. What's good for the goose…

Bibliography

Owner Will Carry actually has a bibliography. However, my book How to Use Leverage to Maximize Your Real Estate Investment Return, which has two chapters on taking back a mortgage, is not in it. I suspect I know the reasons. They are instructive.

Cash resale value

My book says that you should look only at the cash resale value of any paper you take back when selling real estate. It further says that if you do that, you will generally find that you got less for your property than you would have received if you had refused to take back a mortgage.

Overpriced

It says that sellers take back mortgages because they are unwilling to admit that their property is not worth what they are asking. The corollary to that is agents like sellers taking back mortgages because it saves them from telling the seller to cut his price to what the property is really worth.

Suitability

Probably the most important reason How to Use Leverage… would not be on a Realtor's(r) recommended list is my strong stance on the issue of suitability. Owner Will Carry breathes not a word about suitability.

Suitability, also known as the "Know your customer rule," says that you should not sell someone an unsuitable investment. As a general rule, a seller mortgage is an unsuitable investment for a homeowner. Suitability is derived from an interview in which the client is asked about their net worth, income, financial goals, age, health, mortgage-lending experience, and so forth. A seller mortgage would usually be suitable for an income-property seller, because such sellers are financially sophisticated.

I once wrote an article called "Seller mortgages are junkier than junk bonds." A stock broker who sold a junk bond to the typical retired couple would probably be fired and might lose his license. But real-estate brokers, who call themselves "professionals" and are sometimes affiliated with Wall Street securities firms, don't have a clue about suitability. Their ignorance of the subject is exceeded only by their indifference to it. This is a long-running scandal and an outrage, but I'm only one man.

'Better than a CD'

The authors repeat the old saw about seller mortgages having a higher rate of return than certificates of deposit. That's not really true. The default rate on CDs is zero; on seller mortgages, much higher. Net of defaults seller mortgages have lower returns than CDs.

They discuss low-interest rates on seller loans, but they fail to mention IRS's imputed-interest rules at all.

California law

As is often the case in real estate, the authors are from California. They repeatedly tell readers that although they are explaining California laws and practices, other states must be the same. What the authors should have said is, "This is based on our California laws, but there is no such book for your state, and probably never will be, so deal with it." That is, research your local laws and practices and make modifying notes in Owner Will Carry to make it applicable to your state.

Indeed, the only reason to read this book in addition to my How to Use Leverage… is its discussion of CA law. How to Use Leverage… is more comprehensive and objective.

Blather

Owner Will Carry says, "Some people believe that mortgage money will be less available in the future," "Some of the world's greatest financial geniuses have called compounding 'the eighth wonder of the world,'" and "Lenders have tightened their credit requirements."

You can say anything after the phrase, "Some people believe…" I suspect the only "financial genius" they have in mind is Jimmy Napier. And lenders have greatly loosened their credit requirements, not tightened them. There is now a whole subprime lending market segment.

Owner Will Carry is OK as far as it goes, but it only tells about half the story owners need to hear.