First note I ever created is 14 months in and paying, with setup costs below

What does the servicer actually do for the 25 a month? I assumed it was just collecting the payment, which sounds like something a bank transfer already does.

@compass they collect, they run the escrow account and pay the tax bill and the insurance premium out of it, they send the borrower the year end interest statement, and they keep a record that a third party will vouch for. Tender, does any of that change if the collateral is raw land with no insurance to escrow?

The question I always end up at is what happens on month 20 if he just stops. You have a house you already sold, a servicer, and a legal process that costs money. Does the 20% down actually protect you or does it just mean you have more room to lose?

Everything I look at is 60k to 90k houses. Does a 55k note even attract a buyer if I wanted liquidity, or is that too small to be worth anyone's diligence?

The insurance notification piece is the thing most people skip and it is free. We manage properties where the owner finds out about a lapsed policy from the claim denial.

Push on the appraisal. You say your balance is under 80% of value. Whose value? If that 215k was a number you and the buyer agreed on because he wanted the house and you wanted the price, your 80% could be 90% in a real market test.

This is where I get stuck. You just turned 172k of equity into a 25 year receivable. Great yield, but that capital is gone for seven years unless you sell the paper at a discount. How did you decide the 8.5% was worth more to you than the cash?

Why seven years on the balloon and not five? I have been reading that shorter balloons sell better and longer ones give the borrower a real chance to refinance.

Starting from nothing here. When you say he put 43k down, does that money come to you at closing the same way a normal sale would, or does it sit somewhere?

@ember it comes to the seller at closing like any other down payment. Tender, did you keep any written record of why you accepted his income documentation? I am thinking about the file you would hand a note buyer years later.

What stands out to me here, after five years running a service business, is that you paid for the boring infrastructure before you needed it. Most people buy the servicer after the first missed payment.

The comparison I would want is against just keeping the duplex. What was it producing? If it was netting 14k a year on 215k of value, your note at 8.5% on 172k is producing about the same with no roof and no turnovers. If it was netting 22k you gave something up.

I have read the word balloon in about forty posts now and I still am not certain. Does it mean the payment gets bigger at year seven, or that the whole balance comes due?

@juniper the whole remaining balance comes due at year seven. The monthly payment is calculated as if the loan runs 25 years, so at the balloon date there is still a large balance and the borrower has to refinance it or sell. Tender, what happens if he cannot refinance in year seven and the rate environment is worse than now?

Can you show the yield math on the sale price you calculated before signing? You said knowing that number changed the structure and I want to see which direction it pushed you.

Escrowing the taxes matters more than people think on the long game. A tax delinquency on collateral you hold paper against can get ahead of you fast, and the rules on how far and how quickly differ by state.

The difference I notice in managing these is that a buyer with 43k in the deal calls a plumber and a tenant calls me. You bought yourself out of the phone.

Did you sell as is, and did he find anything in the first year that he came back to you about? Trades side of my brain says a duplex that just changed hands generates a list.

@solder that list arrives in month four every time. Tender, was there any inspection contingency or did he take it blind?

What breaks if you do this five times? One servicer relationship and five escrow accounts sounds fine, five borrowers of varying quality sounds like a job.

Genuine question since you have been studying the lending side. Now that you have created one, do you want to create more or buy notes other people created? They seem like different businesses to me.

Is there a market for helping small sellers set this up? Reading this thread, the pieces that made it work are all things a normal seller would not know to buy.

The alternative I keep weighing is taking the 215k cash and buying seasoned notes at a discount instead. You get the discount as extra yield and you did not have to underwrite the borrower yourself. What made creating better than buying for you?

I would have taken the cash and been in two deals by now. Nothing wrong with your note, it is a good note. It is just 172k sitting still for seven years earning 8.5% while I turn the same money three times. Different game, and yours sleeps better.