Setting a note rate by feel instead of by what a buyer would pay can cost tens of thousands later

The takeaway worth keeping is that the terms written into a carried note are the asset, and they get written before anyone knows who will ever want to buy that note. Say a seller carries financing at a rate chosen by feel rather than by what the note market actually pays for paper like that, and the gap shows up the day it needs to be sold. That's reason enough to price a note against real bids before setting the rate, not after.

I did the same thing on the other side of the table, sort of. Gave a buyer a rate I felt good about instead of a rate that priced what he was getting from me. Being the nice guy in the negotiation is fine as long as you know what the nice costs. You paid about 17k for it and you found out eighteen months later, which is the worst time to find out anything.

No balloon on a 30 year note from an individual seller is the part worth flagging hardest. It is not just a resale pricing issue. That document outlives the seller's interest in the property by decades, and every provision in it has to work for 28 more years, including whatever happens when the buyer dies or transfers it. Did the note carry a due on sale clause? Without one, the seller has also given away the right to decide who the borrower is.

The 68,500 quote was close to rational pricing, which is the useful part of this. 88,000 at 5.5% over 30 years is 499.68 a month, and after 18 months the balance is around 85,900 with roughly 342 payments left. Discount that stream to 68,500 and the buyer is earning about 7.8% annually. Note buyers on seasoned owner occupied paper in that price range often want low double digits. At a 10% target the same stream prices closer to 56,000. So the offer you got reflected your coupon and your term, and a colder buyer would have gone lower.

Two levers move that number more than the interest rate does. First, duration. A five year balloon returns most of the principal on a known date, so the buyer's money isn't committed for three decades and the price rises. Second, investment to value. 8,000 down on 96,000 leaves the note buyer at roughly 89% of the sale price, and the sale price is a data point rather than an appraisal. A larger down payment and a supported value both narrow the discount.

The assumption your whole structure rested on is that you'd never need the principal back. If that's true, a 5.5% coupon held to term is a defensible choice and the resale discount is irrelevant. If it might not be true, write the note so it's sellable. A partial sale is also worth knowing about, where a buyer purchases a set number of payments and the note reverts to you afterward, which often nets more than selling the whole thing.

Whether an assignment of the note and deed of trust has to be recorded, and how, varies by state, so confirm the mechanics in writing with a real estate attorney licensed where the property sits before you plan around a sale.

It took me a while to work out what the expert reply meant. So a note is a thing with a price that somebody else sets, and the price depends on terms you already signed. That's the bit I didn't have.

Did the buyer even ask for 5.5, or was it volunteered. In cases like this the person who cannot get a bank loan is not shopping rate, they are shopping for a yes.

The point on loan to value is the one worth underlining. At 89 percent of a price the seller set themselves, a note buyer is being asked to trust that sale as the valuation, and they will not. Every point of extra down payment does double duty, it lowers the buyer's exposure and it proves the borrower had skin in it. An 8,000 down payment on a 96,000 house tells a note buyer almost nothing about the borrower.

I'd never once thought about the note as something with a resale market, even after all the reading I've done. I'd have written 5.5 for the same reason you did.

Worth pushing back slightly on the framing of the loss. You did not lose 17,400. You declined to sell at 68,500 and you are collecting 5.5% on 85,900 from a clean payer, which is around 4,700 a year of interest against a note that would take real work to replace at that risk level. The actual cost is the difference between your rehab financing and what you would have paid otherwise, plus the deals the stuck capital kept you out of. That is a liquidity cost, and it is probably a good deal smaller than 17k. The lesson still holds, so it is only worth checking which number you really paid.

The point about the accounting is right, and it does not change the practical takeaway: get a quote from a note buyer on the note before writing it. A free phone call can be worth five figures of optionality on the rate.