Higher price at a lower rate, or my price with a rate I like?

The notes material has been in front of me for a few months and I still get tangled here, so tell me if I'm off. The price is what you get if he refinances at year three. The rate is what you get if he pays for seven years. So the answer changes depending on which one you think happens?

vellum has it. If he refinances out in year three you barely collected the rate difference and the 9k of price is sitting in your pocket. If he rides it to the balloon the 8.25% wins by a lot more than 9k. So the real question is how likely this guy is to become bankable, and self employed with two thin years of returns tends to get bankable in a few years if the business holds.

Take the rate. Price is one number you get once, rate is the thing that pays you for taking the risk that no bank would take. And if you write it with the balloon at seven years and he does refinance early, you got a clean exit and a decent yield along the way. I'd care more about whether the 12% down is real money or borrowed money.

There's a piece nobody's touched. Whatever price you write is also the number the buyer's basis and your gain sit on, and how gain gets spread across an installment sale is not a napkin question. It varies by how the sale is structured and it's a conversation with your own CPA, not with us. I'd want that answered before I chose, because a 9k price bump isn't free either direction.

Sorry, basic question. Why would a seller ever pick the lower rate? What does the higher price actually buy you if the payments are smaller?

rigging, two things. A bigger price on paper can matter if you ever want to sell the note, because the balance is what a note buyer prices off, though they'll discount hard on rate. And a payment the buyer can comfortably make is a payment that shows up. I've had two tenant-buyers over the years and the one whose payment was tight was the one who was always three days late.

The self employed part is doing a lot of work in this post. Two years of returns that "don't tell the real story" is the exact sentence a bank says no to, and it's also the sentence I'd want backed up before I care about 6 versus 8.25. Bank statements, twelve months of them. If the deposits are steady I'd feel better about either version.

8.25%. I've never regretted the rate on paper I carried. I have regretted the price twice, because the price is what gets argued about at payoff and the rate never does.

Around here the higher-price version can run you straight into an appraisal problem later. When he goes to refinance at year five and the house doesn't support the balance you wrote, he can't get out, and now you're holding a note the borrower wants gone and can't get gone. That's how balloons turn into extensions. Careful with padding the price on a low price point house.

hollow's point is the one I'd worry about most. Also worth asking whoever handles your closing what your state requires you to disclose and record on an owner-financed sale, because that differs state to state and some states don't publish sale prices at all, which changes what a future appraiser can even see.

I'd take the rate and stop trying to optimize. 8.25% on a note secured by a house you know, in a neighborhood you know, is a fine outcome. The 9k version asks you to bet on him staying seven years, and you don't know him.

verity, I read it the other way. The 6% version is the one that doesn't need him to stay, because you banked the 9k at closing. The 8.25% version is the one that needs seven years of on-time payments to beat it.

parcel is right on the math direction but 9k is not a big cushion. Run it. On a note in the low 200s, 2.25 points of rate is a few hundred a month. You clear 9k of difference somewhere around year two or three, and after that the higher rate is just ahead and keeps going. So the 6% version only wins if you think this is a short note.

Everyone's arguing rate and price and I'd be arguing down payment. 12% on a self employed buyer with no bank willing to touch him is thin. If he walks at month nine you're taking the house back with whatever he did to it in the meantime, and I've seen what nine unhappy months does to a kitchen.

Could you split it? Ask price plus 4k at 7.25%. Buyers who bring you two options usually have room between them.

I had to read this twice. So in seller financing the seller can choose to be paid more in total but slower, or less in total but with a bigger certain chunk up front? That's a much more interesting decision than I expected from something called owner financing.

juniper, that's the whole trade. The other half is that price and rate aren't the only levers. Term, balloon date, prepayment terms, a late fee with teeth, how taxes and insurance get escrowed, all of that moves the value of the note as much as 2 points of rate does. marlow, if you're deciding between two shapes handed to you by the buyer, you're negotiating on his field.

I voted for the rate but only after reading thicket's crossover point. Before that I'd have taken the price because a number at closing feels safer than seven years of hoping. What actually changed my mind is that if he defaults early you have the house back either way, and in the 6% version you gave up the yield for a padded price the appraiser may not agree with.