The down payment percentage that sounds safe on a residential note often prices the paper as if it never was

The assumption doing the most work is that foreclosure timeline is the main discount driver, but the resale pool on the collateral often hits harder.

What property type is the collateral?

The analysis is solid. The assumption doing the most work is that you actually intend to hold to maturity when you create the note. Most people creating seller-financed paper think they will hold it, and they structure accordingly, then a capital need or a change in circumstance puts them in the note market 18 months later with paper that was never built for a buyer.

The gap between hold-to-maturity structuring and tradeable-note structuring is mostly set at origination. You cannot add seasoning retroactively, and you cannot change the LTV without a paydown or a recast. What you can do is build the note as if it will trade from day one, which means 70 percent or better, a rate at or above the note-buying market's expectation for the property type, no unusual collateral characteristics that compress the buyer pool, and terms that make the yield math clean on the buy side. If you hold it, the tighter LTV just means more equity cushion. If you sell it, you get a bid that reflects the collateral rather than punishing the process risk.

The property type point is undersold in most seller-financing conversations. A performing note on a standard single-family detached in a liquid market with 70 percent LTV and 12 months of seasoning trades well. The same payment history on a condo in a state with aggressive HOA super-priority lien enforcement, or on a manufactured home, trades at a discount that surprises originators who were not thinking about the note buyer's collateral recovery scenario.

Worth also confirming with your attorney what the foreclosure timeline looks like in the specific state where the collateral sits, because the judicial versus non-judicial distinction materially changes the carrying cost assumption in a default scenario, and that flows directly into what a buyer will pay.

What property type is the collateral, and is the state judicial or non-judicial?

The post assumes you can get a preliminary bid that reflects real exit price, but most note buyers will shade that quote further once they see the actual docs.

Sold a note in 2021, 78 LTV on a $185,000 house in Mesquite, borrower had eight months of clean payment history, standard SFR nothing weird. Best bid I got was 84 cents and I thought that was an insult until the buyer walked me through his waterfall on a judicial state scenario and I stopped arguing. Texas is actually non-judicial and it still penciled out that way because the property was a 1970s brick ranch that needed a roof and he knew I knew it.

The line that's accurate but undersells the problem is "20 percent equity can absorb most of that in a stable market." It can absorb it on paper, meaning the math works if everything moves at list price in 60 days, which is not a scenario any note buyer is paying for. What they're actually buying is the worst Tuesday in a bad quarter, and 20 points of equity on a house that needs $18,000 of work before it'll clear FHA appraisal is not 20 points anymore.

What's the property type on the note you're holding?

The part I want to test is the implied baseline that 70 percent LTV is where paper becomes cleanly tradeable, because that number moves significantly depending on the payment history you can show a buyer. A note at 75 LTV with 24 months of on-time payments often trades better than a note at 68 LTV with zero seasoning, because the buyer's real anxiety is behavioral, not just collateral math. Seasoning converts an underwriting assumption into an observable data point, and note buyers price that difference, sometimes 3 to 5 points of yield, which is real money on a 200k note. The LTV floor matters, but it interacts with seasoning in a way the original post treats as separate when they are actually the same variable expressed differently. So if you are structuring a note you might want to sell in two or three years, building in a slightly higher rate to compensate the buyer for early exit risk is worth considering from day one, because the alternative is taking the discount at the worst possible moment.

What does your payment history look like, and did you collect any documentation at origination that a buyer could use to verify the borrower's income at the time of the sale?