If I "take back" a mortgage for a buyer ("carry" a second mortgage)
what does that acutally mean in terms of money changing hands? i.e.
let's say for a $200,000 commercial condo that I am selling the buyer
needs 25% down but only has 12.5%.  So I "carry" $25,000 for them and
I set an interest rate, sign a paper with them, and they send me
monthly principal and interest payments.  At this point do I need to
hand over $25,000 to their bank for this to be put into play?  Or does
their bank just give me $25,000 less at closing?  This is the piece of
the puzzle I am missing.

In a "carry back" no money changes hands.  You get a mortgage for a
certain amount and they pay you just like they would a bank with the
right of foreclosure.  In the scenario you present it appears they
need a down payment to give to the bank.
If that is the case you would be lending them the actual cash and you
would have a note drawn up for repayment with the condo as collateral.
However, it is doubtful the primary mortgage bank would give the
primary loan knowing that they could not come up with the down payment
on their own.  At closing they would most likely be signing a
statement that they did not borrow money for the down payment.

If you want to cash that note in for lump sum of cash go to
http://www.chrisblanks.com

I want to bring to your attention the danger of doing a carry-back.
What can happen, is the mortgagee is paying on two loans, one primary
loan and one second mortgage (yours). Both loans are secured by the
same property. They become strapped for money, fall behind on their
mortgage, maybe they are a day or two late with you, but you don't
note anything amiss. Meanwhile, they fall into arrears with their
first mortgage and it goes into default. They foreclose, and after
making up arrears to current, collection and foreclosure expenses, the
propertry is clear, however YOU on the other hand, were in what is
called "SECOND POSITION" --this means that the person who forecloses
FIRST has FIRST right of recovery, in full. The only hope in that case
would be if the mortgagee enters into bankruptcy wherein you may
receive a percentage of the recovered money, but not all.

I would strongly advise against this, as I have a personal experience
in this.  A business savvy member of my family lost a huge amount of
money when this very thing happened. He thought that since the loan
was secured with the property, he was in no real danger of losing
anything. Unfortunately, he was wrong, he never knew the borrowers
were in default on the first mortgage and he was shocked to discover
this though the mail.

Maybe think about getting different security, perhaps another
property, acreage, be creative, but don't take second position.