Does the discount on a carried note shrink if the property appraises higher than the sale price

Note buyers price off appraised value rather than sale price. A $180k note against a $240k comp is 75% LTV, which is cleaner paper than it looks. Take a carried note with a $140k balance where the property has comped up since origination: paper in that shape has traded at 88 cents where the holder was braced for 82. The equity cushion moves a buyer more than the borrower's payment history does.

In Phoenix right now, paper in that shape is pricing at 82 to 88 cents.

This exact gap comes up regularly. Take a $155k carry on a parcel that comps around $190k, which pencils to roughly 82 percent LTV against the appraisal. A note buyer shopping that paper six months later will usually give credit for about half the spread. They run their own BPO, it comes in below the appraisal, and they price as though the LTV were 78 percent instead of the 82 the seller calculated. So yes, the gap helps, but do not count on a full dollar for dollar lift from it. The bigger lever a buyer watches is payment history and whether the borrower has put any cash into the property since close. Two on time payments and a gravel driveway the borrower poured will mean more to the pricing conversation than the appraisal cushion does.

Honestly the appraised gap is less useful than you'd think, because the note buyer is going to pull their own BPO and price to that anyway, not your comp. What actually moves the needle on secondary pricing is the coupon rate on the note itself, so I'd push for 8.5 or 9% on that carry instead of whatever feels comfortable. That alone does more for your eventual exit price than a $30k cushion in appraised value.

The part note buyers actually stress over is borrower payment history once the note is seasoned, not the origination appraisal. A $240k comp helps your LTV story on paper, but if your buyer put down $30k on a $210k sale they've got real skin in the game regardless of what the parcel might fetch. What I'd want to know is whether you're planning to sell this note immediately at origination or after 12-24 months of payments, because those are two completely different pricing conversations. Have you actually locked in who's buying and what their credit looks like, or are you still figuring that part out?

Flip the question: a $240k appraisal on a $180k note is roughly 75% LTV, which most buyers will actually price tighter than you expect because seasoning matters more than equity cushion at origination.