What Is a Seller Carry Second?

How does a seller carry second work?

On a normal purchase, you pay the seller the full price at closing with your cash and a loan. With a seller carry second, the seller agrees to receive part of the price later. You sign a promissory note to the seller for that amount, secured by a mortgage or deed of trust that records behind the first lien.

"Second" refers to lien position. If the property is ever sold or foreclosed, the first lien is paid before the second. That ordering is why the first lender and the seller both care about the terms.

Axelrad's transactional page defines seller carry plainly in its calculator glossary: debt owed to the seller in second lien position, and not automatically cash in escrow. That second point trips up investors who count a seller carry as if it were money at the closing table.

What does a seller carry second change in your numbers?

Axelrad's calculator glossary makes the cash-flow point too: when you look at DSCR (debt service coverage ratio, rental income compared with debt payments), both liens matter.

Will the first-lien lender allow it?

Ask before you sign. Many first-lien lenders have rules on subordinate financing, such as limits on combined loan-to-value, requirements for how the second's payments are structured, or a flat prohibition. If the first lien is the seller's existing mortgage on a subject-to deal, you are dealing with a lender that never approved you, which raises separate due-on-sale questions.

Where does gap funding fit?

Sometimes a seller carry second is not enough on its own. The seller still wants some cash, or there are arrears and closing costs. Gap funding can cover what is left, and gap funding is typically repaid after closing through a seller carry. Gap rates start at 2.5% on Axelrad's gap funding page. Our guide to gap transactional funding covers the cash-to-close mechanics.

A worked example

Example only, with hypothetical round numbers. You agree to buy a rental for $300,000.

1. A new first-lien loan covers $225,000.
2. The seller carries a $45,000 second at negotiated terms, with a balloon in five years.
3. You bring $30,000 plus closing costs.

Without the seller carry, you would need $75,000 plus closing costs. With it, your cash at closing drops by $45,000, but you now have two monthly payments. If the rent covers the first loan comfortably but not both, the deal may still not work. Run the cash flow with both payments before you agree.

Why would a seller agree to carry?

Sellers carry for practical reasons. Some want monthly income instead of a lump sum. Some own the property free and clear and are in no hurry. Some cannot get their price any other way, and carrying part of it is how they get there. Knowing which one you are dealing with shapes the negotiation: an income-minded seller may accept a lower rate for a longer term, while a seller who simply wants the price may care more about the balloon date than the rate.

What terms should a seller carry second spell out?

1. Amount, rate and payment schedule (or a payment-free period, if agreed).
2. Maturity or balloon date, and what happens if you cannot refinance by then.
3. Late fees and default remedies.
4. Whether the note can be prepaid without penalty.
5. How it is recorded and its lien position.
6. Who services it and how payments are tracked.

Use a real estate attorney in the property's state to draft or review the documents, and confirm with title how it will record the second.

Key takeaways

• A seller carry second is a seller-held note secured behind a first lien.
• It reduces cash at closing but adds a second payment.
• A seller carry is debt, not cash in escrow.
• Ask the first-lien lender whether it allows subordinate financing.
• Gap funding can cover remaining cash and is typically repaid after closing through a seller carry.

Structuring a seller carry?

If the seller carry leaves a gap at closing, send the deal to Axelrad and the team will look at whether gap funding fits and how it gets repaid.