When you're the one carrying, is it the buyer or the property you underwrite?

Neither camp as stated, because both are arguing about inputs and the thing that actually decides your outcome is the document. I've read carry-back notes where the seller had a 30% cushion and a borrower with a great story and still spent fourteen months getting anywhere, because there was no assignment of rents, no requirement to name the seller on the insurance policy, no tax escrow, and a cure period long enough to drive a truck through. On a fourplex I'd want proof of insurance with you as loss payee, annual proof of taxes paid, and something that lets you reach the rents if he stops paying you. Whether an assignment of rents is enforceable and how fast varies state to state, so that's an attorney conversation in your state, not a template one. Structure and borrower both matter. The paper is what converts either one into money.

fathom, is that a third camp or is it just camp one done properly? I read structure as part of the cushion argument.

Put it in the collateral's own economics and you get most of both camps for free. A fourplex either supports the debt service at market rents with a mediocre manager, or it doesn't. If your note payment is 62% of stabilized NOI, the building can absorb a bad operator, a vacancy, and a bad year, and the borrower has something worth fighting for. If it's 94%, no down payment and no bank statement saves you, because the first turnover puts him behind. I'd size the note off a stress case on the building before I looked at either of anchor's camps.

sextant's frame is the one I'd use, and I'd add the operator's other stuff. I've been on the buying end of a carry and the seller never asked what else I owned. If your buyer has three other properties bleeding, your fourplex payment is the one he skips because you're the friendly lender and the bank isn't.

The borrower, and specifically reserves after closing. Everybody arrives with a down payment. Almost nobody arrives with a down payment plus six months of payments plus a water heater. I ask for the statement dated after the closing estimate, and the answer to that one question has told me more than everything else combined.

thatch, would you really turn down a 20% down buyer with nothing left over, for a 10% down buyer with six months in the bank?

tally, on a fourplex, yes, most days. The 20% guy with an empty account defaults on the first surprise and you've got a cushion you now have to spend a year converting. The 10% guy with reserves keeps paying and I keep collecting interest, which is the reason I did the deal.

This thread is finally making the note-as-asset thing click for me. If I'm the seller I'm not really selling a building, I'm buying a stream of payments and paying for it with the building. So the diligence question is the same one a lender asks. Is that fair or am I oversimplifying?

vellum, that's about right, with one difference that matters. A bank that forecloses wants cash and moves on. You already know this building, you managed it for a decade, so getting it back is less of a disaster for you than it would be for a bank. That asymmetry is real and it's the strongest thing camp one has going.

Camp one and I'll take the argument. Everyone in here talks about foreclosure like it's a catastrophe. I've taken two properties back on paper I carried. It's slow and it costs money and it's genuinely unpleasant, and both times I ended up with the asset plus the down payment plus every payment made, and resold at a higher price than the first sale. Not fun, not fatal. Judging character is where I've actually lost money.

flint, that only holds in markets and years where the resale is higher. Structure it assuming the second sale is flat and you needed a new roof in the meantime, and the arithmetic on camp one gets thinner fast. Your two outcomes are two outcomes.

Dumb question, what's the actual difference between the seller foreclosing and a bank foreclosing? Is it the same process?

rigging, the process depends on what secures the note and what state the property is in. Some states run it through the courts and it takes a long time, others use a trustee sale that's much faster, and the paperwork is either a mortgage or a deed of trust depending on where you are. Anyone carrying paper should have their own attorney walk them through the timeline in that state before closing, because "how long does this take here" changes the entire risk calculation.

I'd put it on the borrower, and I'd steal from screening. Verify income at the source, not from a document he hands you. Twelve months of statements from the institution, current landlord or mortgage history, and a written explanation of any month that looks different. When I applied that to tenants my problem rate dropped hard, and a buyer on a seven year note is a tenant with a much longer lease.

Even split, and I'd cut price before I cut either. I've sold four things on my own paper. The one that went wrong had a nice cushion and a buyer I liked, and what actually saved me was that the payment was small relative to what the land produced. Room in the payment fixes more problems than either diligence camp.

In cheap rural markets the cushion argument gets unreliable, because the forced sale price in eighteen months is a guess with a wide range. Three comps and one of them's a barn. I lean borrower there because the collateral number I'd be underwriting isn't a number I trust.

Something I'd fold in from the licensing side of things. If you end up carrying paper on more than a couple of properties, or on owner-occupied ones, there can be rules about who's allowed to originate and how the loan has to be documented, and it varies by state and by whether the property is owner-occupied. Worth a single call to an attorney in your state before deal number three rather than after.

Borrower, then structure, then stop building spreadsheets. anchor, you've built two of them and the third won't tell you anything the bank statements will.

I voted structure. Not for the cushion argument, for the boring clauses. My worst note experience was a buyer who let the taxes go, and nothing in the note required him to show me a receipt. Two years to find out. One sentence in the document would have caught it in twelve months.

sextant's ratio is where I'd start on a fourplex specifically, because four units means four turnovers and a shared roof. The thing that breaks at this size isn't the borrower's character, it's a 9k expense landing in a month with two vacancies. If the payment leaves no room for that, you've written a note that defaults on schedule.

Nobody's said inspect the building for the borrower's sake. If you know that fourplex has eleven years left on the roof and a boiler on borrowed time, the buyer is going to hit a wall in year three whether or not he's a good guy. I'd rather disclose it, price it in, and have him budget for it than get the property back with the same roof and one more bad year on it.

Camp two seems to require you be a good judge of people, and most people who think they are aren't. That's how it looks from the sidelines, where I mostly watch.