A carried note is only as good as the collateral behind it, and that reorders every other question

That gap at year three is the exact window that kills seller-financed deals.

What's the vacancy rate in that zip been running the last 24 months?

Your attorney is right, and the 12 percent down is a bigger problem than the rate.

The distressed comp question is the one most sellers never actually pull before they sign.

I bought a performing note in 2021 backed by a duplex in Lakewood, paid 94 cents, borrower quit month eight. Foreclosure took fourteen months in Pierce County and I came out with a building worth maybe 78 cents on my original dollar after holding costs. The note looked clean on paper and the collateral looked fine until I actually needed it. Tacoma and Lakewood are not the same market but they share a courthouse and that timeline wrecked my yield.

Twelve percent down on a fourplex in that zip is thin if rents soften and a distressed buyer needs to see 20 below market to move fast. Run the year-three balance against 75% of current assessed, not current list, and see where you land.

The piece that should tighten anyone's terms is running a realistic timeline instead of a rosy one. Take a seller-financed duplex in Spokane carried at 8.5 percent with 15 percent down. The buyer goes quiet at month 19, and by the time the deed comes back through a deed-in-lieu the note holder is 26 months in and the building has deferred a roof that eats $18k before it can be relisted. The note looked fine on paper. The collateral looked fine on paper. The carrying costs during the dead zone were the thing nobody modeled. The discipline that follows is to underwrite a minimum six-month dead zone into any note you write, legal fees plus taxes plus minimum maintenance, and if you cannot stomach that number, do not write the note.

The thing that does not work is pricing the note off current income without stress testing vacancy at the collateral level. A common pattern is a seller who carries paper on a fourplex, runs the math on a stabilized building, and finds out in month 19 that two units have been trashed and the buyer stopped paying because the repairs put him underwater. What comes back is a different building from the one that was underwritten, carrying deferred maintenance, possible code violations depending on how long the foreclosure dragged, and comps that have shifted since the note was written. In Washington state a non judicial deed of trust foreclosure runs roughly 120 days minimum from notice of default, and that assumes nothing gets contested. The gap you are feeling is real, and it widens across exactly those months when nobody is collecting and nobody is managing the property. On the Tacoma fourplex specifically, 12% down is thin collateral in a distressed disposition scenario if that zip code has soft rental demand underneath the surface numbers. The figure worth knowing is what bank owned sales in that specific submarket cleared at in 2020 and 2021 when volume spiked, rather than what retail sales look like today. Distressed price discovery happens in volume markets, and a stable market with three comps will not give it to you. If the note balance at year three sits above what a motivated REO buyer would pay at a 10 cap, or whatever the distressed clearing rate is in that pocket, that spread is the actual risk position, well ahead of the 7% coupon. The rate is the return if everything goes right. The collateral is the floor if it does not.

Tacoma distressed sales in some zip codes are sitting 18 to 22 percent below retail right now depending on condition, so the gap you are describing may be a good deal more than theoretical. The year three balance on a 15 year note at 7 percent with 12 percent down is still fat against a buyer who has not had time to build equity, and if that buyer stumbles in a soft rental market you are taking back a building that may need to be re-tenanted before you can sell it. What I would want to know before anything else is what that fourplex actually cash flowed over the last 12 months with real vacancy and real maintenance pulled out, because a distressed buyer usually found the property that way for a reason.

Carried a note on a duplex in Stockton, 10% down, and got back a property worth 31% less than the note balance at month nineteen.