Selling a partial off a 15 year land contract to recycle capital, what discount should a seller expect?

Question

The capital recycling math on the owner-finance model stops making sense at a certain point, and it is worth working through exactly where. Say basis is $28,000 all in on 40 acres. The parcel sells at $68,000 with $6,000 down, 9 percent over 15 years, and the payment lands near $629. That leaves $22,000 of the operator's own money sitting in a note for a decade and a half, which kills the ability to do the next four deals. The answer usually given is sell a partial, meaning the first N payments go to a note buyer and the operator keeps the tail. What yield do land contract buyers actually price at on unseasoned paper, and how do they treat the fact that the $68,000 price includes a premium for offering terms? The safe assumption is that they underwrite to their own value opinion and ignore the contract price. If they haircut the land to say $30,000 of value, does a partial even clear basis?

Rena Expert · Accepted Answer

Land paper prices worse than owner-occupied residential paper, and unseasoned land paper with a low down payment prices worst of all. Buyers in that space are commonly looking for yields in the high teens to well above twenty percent, and some won't touch raw land at all. Get quotes before you write terms, because the exit price determines whether the structure works.

You've already identified the thing that governs the trade. A note buyer underwrites to their own value opinion, and on rural land that opinion usually comes from comparable sales rather than from what a payment-motivated buyer agreed to pay. Your $68,000 contract price with $6,000 down is roughly 91% investment to value against the contract price. Against a $34,000 independent value, the same balance is over 180%, and no institutional-minded buyer funds that. The partial is how you get around it: you sell, say, the first 60 payments, and the buyer's exposure is the present value of $629 for 60 months at their yield, maybe somewhere in the mid twenties of thousands, secured by land worth more than that. That can clear a $22,000 basis. It can also come in under, which is why the down payment you take matters more than the interest rate.

Two things you haven't raised. State usury caps apply to seller-financed land in many places, and a 9% coupon is safe in most but not all, so confirm the cap for the state where the land sits. Separately, if you start selling notes and partials to private individuals rather than to a professional note buyer, you may be offering securities depending on how it's structured and marketed, and that's a question for a securities attorney before the first sale rather than after.

ryanmck27 · Answer

The seasoning point is the one that changed my thinking. Twelve clean payments on autopay reportedly moves pricing more than anything else you can do, which argues for building the exit into month 13 rather than month 1.

megan_doyle15 · Answer

What's a partial actually look like on paper? Do you assign the whole contract and then get it back at the end, or is it split some other way?

aliyah_b · Answer

@megan_doyle15 as I understand it the note gets assigned in full to the buyer with a written agreement that it reverts to you after the agreed number of payments. That's why the servicing setup matters, somebody neutral has to be counting.

wendy_park48 · Answer

Read the reversion language closely before signing anything. What happens if the payer defaults in month 40 of a 60 payment partial is where these agreements differ most. Some require the seller to buy the partial back. Others let the note buyer keep the collateral and hand back nothing, and a better drafted version gives the seller a right to cure and step back in. That clause is the entire risk transfer, and it is usually one paragraph sitting in the middle of the document.

stephen_ok9 · Answer

Sable, the other route is a private lender against the note as collateral instead of selling a piece of it. You keep the whole cash flow and pay a coupon. On $22,000 that's a small enough amount that a note-secured line might be cheaper than giving up 60 payments at a mid-twenties yield.

angela_burke · Answer

Servicing cost is real once there are four of these running. Third party servicers commonly charge somewhere in the $15 to $35 a month per loan plus setup, and any note buyer will want a servicer of record anyway. That is cheap compared to a partial, and it produces the payment history that gets the note priced better later.

Selling a partial off a 15 year land contract to recycle capital, what discount should a seller expect?

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