Structuring the note I'm about to carry so it's still worth something if I ever sell it

You did the right thing asking for quotes before signing. Now ask those same two buyers for their actual pricing sheet or at least the inputs they price off, and get it by email. "Low teens yield" is a sentence, not a quote.

On the payer, underwrite him like a lender would. Two years of returns, the 1099s behind them, twelve months of business bank statements, a credit report he pulls and sends you, verified reserves after the down payment. If his down payment is coming from a family member, know that now. None of that is hard, it's just work most sellers skip, and skipping it is why some seller notes trade at ugly discounts.

What does that house rent for? If you end up owning it again in year three, that number is your floor, and it tells you whether taking it back is survivable or just slow.

Two things I don't follow. People keep writing ITV instead of LTV and I can't tell if they mean something different. And why does a balloon change the price of a note at all, if the payments are the same either way?

@vellum ITV is investment to value, the amount the note buyer is paying divided by the property value. LTV is what the borrower owes divided by value. They diverge because the buyer buys at a discount, so a note at 85% LTV can still be a 72% ITV purchase. The buyer cares about their number, not yours. The balloon matters because it sets when the money comes back, and a shorter balloon means most of the cash arrives as one lump that depends on the payer refinancing or selling, which is a risk they price for.

Juniper, pick which one you are before Thursday, because the structures really do differ.

If you're holding, the 15% down at 8% is the better asset for you. You get more interest on a bigger balance and you're the one who decided the risk was acceptable.

If there's a real chance you sell within a couple of years, option 2 is stronger, and not because the rate is nicer. A 180k balance against a 240k house is 75% LTV, and after a discount the buyer is in at maybe 65% of value. That's the range where quotes get better, and the improvement in price usually outruns the half point of rate you gave up.

The part I'd do either way: use a licensed servicer from payment one, escrow the taxes and insurance, and keep every underwriting document you collected in one folder. Seasoning is only worth something if somebody else can verify it. And yes, a partial sale is real, you sell a set number of payments and keep the tail, and it's usually the cheapest way to raise cash out of a note you'd rather keep.

Don't build a structure around an exit you haven't decided to take. Build it around the fact that you might.

When those quotes turn into paper, read the purchase agreement before the price. The ones I've seen carry a representation that the payment history is accurate, a repurchase clause if a stated fact turns out wrong, and sometimes a right of first refusal on the remaining payments if you sold a partial. Any of those can cost you more than 2 points of price.

Also confirm with your attorney how the assignment of the security instrument gets recorded where the property sits, because recording practice and fees differ by state and a sloppy assignment is one of the things that kills a note sale at the last minute.

Two clauses to have your attorney draft deliberately rather than take from a form.

Due on sale, so the buyer can't hand the house and your loan to somebody you never underwrote. Whether and how it's enforced depends on your state and the instrument, so ask.

Prepayment. You want to think about whether early payoff is fine with you, because on a 7 year balloon at 8% he's likely to refinance the second a bank will look at him. Prepayment penalties on owner financed residential loans run into state level restrictions and federal rules on how the loan was originated, and that's a question for a lawyer in your state before signing, not after.

Numbers, since the thread is talking around them.

At 8% on 204k over 360 months, payment 1,497. Balance at month 84 is about 188.7k. Discount the 84 payments plus that balloon at a 12% yield and you get roughly 175k against a 204k balance, so about 86% of face, a 29k haircut. That matches what you were told.

Now the partial. Sell the first 120 payments at the same 12% yield and the present value is about 109k, and you keep the balance from month 121 forward. You give up nothing on the tail and you raise real cash. On a balloon note the partial gets structured differently because there are no payments past month 84, so if you want that flexibility, the term matters.

Rate is the weakest lever you have. Going 8% to 7.5% moves the payment about 60 dollars. Going 15% down to 25% down moves 24k of your risk onto him and moves the buyer's ITV by roughly ten points. Spend your negotiating room there.

How did you get two note buyers to quote a note that doesn't exist yet? I've been trying to understand how that side sources anything and it looks like a phone book business.

The question I'd sit with for a day: would you be okay owning this house again in month 30, with a tenant in it or with it empty, after paying whatever it costs to get it back? If the answer is yes, 15% down is fine. If the answer makes you tighten up, that's your answer on the down payment and no spreadsheet is going to talk you out of it.

Keep your listing broker in the loop on the structure. Disclosure duties around seller financing terms and how they get written into the contract differ by state, and your broker's forms may not cover a carried note at all without an addendum drafted by counsel.

What's this costing you to set up? I'd want the attorney fee for the note and security instrument, the recording fee, the servicer's setup charge and monthly, and whatever you spend pulling credit and verifying income. On a 204k note it's probably small, but it comes off the yield and I never see it in these threads.

If he refinances in month 20, do you actually lose anything? You collected 20 months of interest at 8% and got the full balance back. I ask because everyone in the thread is treating early payoff as a problem and I can't see the hole in it yet.

@compass you lose the asset you spent all this effort creating and you're back to finding somewhere to put 200k. That's the cost.

1,497 a month landing without a tenant call attached to it is the version of this I like. How the interest gets taxed against the gain on the sale is a CPA question and I'd get that answered before Thursday too, since it changes what the deal is actually worth to you.

In my price range the note buyers won't look at anything under about 50k of balance, or they'll look and quote something insulting. At 204k you're in the size they actually want, which is worth knowing when you read the quotes. You have more negotiating room than you think.

On self servicing, don't. I did it on a small note to save the monthly fee and when I went to sell it I had a spreadsheet and a stack of Zelle screenshots, and the buyer priced the file like the history didn't exist. Cost me multiples of what the servicer would have charged over three years.

Same conclusion as quarry from the other side. A servicer does the ledger, the escrow analysis, the year end statements, and the demand letters if it comes to that, and they do it in a format a third party will accept. You are paying for a record somebody else believes.

@sextant I follow the math but I think the conclusion is off. Juniper hasn't said she needs liquidity. Designing the note around a 12% exit yield means giving up real income for years to protect a discount she may never take. Hold it, collect the 8%, and if life changes, sell a partial then and eat whatever the market pays. Optimizing for an exit you might not use is how people end up with a worse asset and a nicer story about it.

@sable I wondered the same. Juniper, did you find those two buyers cold or did somebody refer them? I've got a list of names off the internet and no idea which ones are real.

Dumb question I'd rather ask here. If the taxes get escrowed by the servicer, whose name is the tax bill in? He owns the house at that point, right, and you just have the lien?

@ember yes, he owns it, you hold the lien, the bill is his and the servicer just collects and pays it from escrow.

Juniper, one wording thing I'd nail down: the exact insurance requirement in the note. Minimum coverage amount, that you're named as mortgagee, and that you get notice of cancellation. I've read forms where all of that was a single vague sentence.

Two years of 1099 income tells you very little about seasonality. Ask him which months are thin, then look at whether 1,497 survives those months.

A tenant of mine turned into my buyer two years ago and I carried it, smaller number than yours. The thing I underestimated was how differently I behaved once I was the lender instead of the landlord. When he was late I wanted to go fix something, and there was nothing to fix. Servicer handled the letters, which was better than me handling them. On your Thursday counter, the extra down payment is the piece he'll fight you on hardest and the piece worth winning.