What a first seller-financed note usually needs to hold up, with setup costs laid out

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.

@jessreyes12 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 worth asking is what happens on month 20 if a borrower simply stops paying. At that point there's a house that's already sold, a servicer, and a legal process that costs money. Twenty percent down does add a cushion, but it's worth working out precisely whether it protects principal or simply widens the room to absorb a loss before recovery.

On smaller notes, say 55k to 90k, liquidity depends heavily on the note buyer pool. A note that size does attract buyers, but the diligence bar and the discount tend to be steeper than on larger notes, since fewer funds will look at anything under six figures.

The insurance notification piece is the thing most people skip and it is free. Properties are regularly managed where the owner finds out about a lapsed policy from the claim denial.

Push on the appraisal. If the balance is under 80% of value, whose value is that based on? If a sale price was a number the buyer and seller agreed on because one wanted the house and the other wanted the price, an 80% loan to value on paper can turn into 90% under 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?

@bmoreno23 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? That's the kind of file a note buyer years later will want to see.

What stands out is paying for the boring infrastructure, servicing included, before it's needed. Most new lenders buy the servicer only after the first missed payment.

The comparison worth running is against simply keeping the property. What was it producing? If a duplex sold at 215k was netting 14k a year, a note at 8.5% on 172k produces about the same with no roof and no turnovers. If it was netting 22k, something was given up in the trade.

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?

@kevin_lombard 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 that was calculated before signing? Knowing that number is said to have changed the structure, and it would help to see which direction it pushed things.

Escrowing the taxes matters more than people think on the long game. A tax delinquency on collateral behind a note can get ahead of a lender fast, and the rules on how far and how quickly it can run differ by state.

The management difference is the whole thing. A buyer with 43k in the deal calls a plumber. A tenant calls the owner. 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.

@mitchell_ray4 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 manageable. Five borrowers of varying quality sounds like a job.

A 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? Those are two different businesses, and the skills that make one work do not carry over cleanly to the other.

Is there a market for helping small sellers set this up? Reading this thread, the pieces that made it work are all things a typical 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.