The interest rate and the yield are not the same number, and the gap is the part that surprises most first-time note holders when they go to sell.

The Maplewood note I'm looking at is exactly why I've been sitting with this question for three months. I keep running the 5-year balloon scenario and landing somewhere uncomfortable, because my basis in that property is low enough that a 23k haircut on a 200k note sale isn't catastrophic, but it isn't nothing either.

Where I'd push back a little is on the framing that the opportunity cost is "always real." It is real, but the denominator matters. If my alternative is parking that 200k in a HYSA at 4.8, the gap between 6.4 realized yield and 4.8 risk-free looks a lot thinner once I account for servicing friction, 1099-INT headaches, and the fact that I'd be the one calling a Maplewood borrower about a late payment. That's not an argument against carrying the note, it's an argument for pricing the rate at 9.5 or 10 and building the friction cost in from the start rather than thinking of 8 as the floor because it feels competitive.

My balloon question back to you: are you sizing the balloon to the borrower's realistic refi window, or to what feels like a clean number?

The balloon term is the right variable to isolate. A 3-year balloon and a 7-year balloon on the same 200k face, same rate, same borrower profile price very differently in the secondary market, and most sellers building the structure do not run both scenarios before they sign.

The assumption doing the most work in your example is the discount rate the note buyer applies. You used 12 percent, which is defensible for a clean performing note with solid LTV and a creditworthy borrower, but a buyer looking at thin seasoning, an unverified borrower, or a property type they consider illiquid will push that to 14 or 15 fast. At 14 percent yield to the buyer, your 200k/8 percent/5-year balloon prices closer to 170k, and the seller's realized yield on capital out the door drops again. The discount is not linear, so sellers who anchor to the 12 percent scenario can misread their liquidity position by a meaningful amount.

The risk you did not name is the hold-to-balloon assumption embedded in a seller's sense of "I am keeping this, so yield does not matter." If the borrower cannot refinance at balloon, the seller faces extend, modify, or foreclose. None of those are free, and the foreclosure path especially has carrying costs that retroactively compress the yield on capital that was never returned on schedule. The opportunity cost framing you described is the right one, and it gets sharper when a forced restructure delays the balloon.

What is the LTV at origination on the note you are structuring, and have you stress-tested the collateral value against what a distressed sale would look like if you had to take the property back at balloon?

Five-year balloons are everywhere right now and I'd push back on the 6.4 figure, not because the math is wrong but because it assumes a clean borrower profile at time of sale. The bridge paper I hold runs 12 to 18 months stated at 10 percent, and when somebody needs liquidity early I am seeing realized yields to original face in the 5.8 to 6.1 range, so the seller-financed 30-year am note is actually in better shape than short paper on that metric, which surprises people. The piece that compounds everything is that the note buyer underwrites the borrower fresh at time of sale, not at origination, and if that borrower's credit or business situation has moved at all, the yield demand goes up and the price drops in a way that stacks on top of the baseline discount you already described. I have watched a 9 percent stated note price to a 14 percent yield because the buyer flagged a tax lien that showed up after origination, and the seller had no idea that was coming. What LTV are you underwriting at origination, because that single number probably moves the buyer's yield assumption more than the balloon term does?

Saw a buyer reprice a 75 LTV to effectively 80 on photos alone, deferred maintenance visible in the listing shots, and the yield demand jumped almost a full point. Nobody had flagged the collateral condition as a pricing variable, they were all focused on the balloon term and the borrower's credit score. What does the property look like right now, not at origination?

The variable that moves alongside balloon term and gets less attention is seasoning, because a note buyer pricing paper on day one is buying unproven borrower behavior, and that uncertainty is priced as yield spread on top of whatever the LTV justifies. The same 200k note at 8 percent with 24 months of clean payment history behind it might price at 11 percent yield instead of 13, which on a 3-year remaining balloon closes a meaningful chunk of that discount gap without the seller changing anything about the original structure. So the timing of when a seller decides to sell matters almost as much as the terms they negotiated at origination. What is the borrower profile on the note you are structuring, specifically whether they could document income at origination, because that single fact sets the floor on what a note buyer will demand before seasoning can do any work?

Seven-year balloons price better than five-year in my experience reading these decks, but only if the borrower profile holds up. A 78 LTV with a self-employed buyer and no seasoning on a seven-year still gets hammered. What nobody has touched on here is what happens when the underlying property is a niche asset type. I read a note package last spring tied to an RV park, seller-carried at 7.5, three-year balloon, and the discount the buyer applied was not primarily about the rate or even the term. It was about the asset. Buyer came in wanting 14 percent yield because they could not comp the collateral to anything liquid. The seller thought they had a clean note. They had a complicated appraisal problem wearing a note costume.

The line about opportunity cost being real even when nobody is writing a check is the part most carriers I talk to have not actually internalized. They booked a sale, they are collecting payments, they feel whole. But if they could have deployed that same capital into something else at 10 percent, the 8 percent note is costing them 2 points per year for however many years they hold it. That math gets ugly on a seven-figure carry. What is the LTV on the note you are evaluating, because if it is above 75 and the asset is anything other than vanilla SFR or straightforward commercial, the balloon term is almost secondary to the collateral discount risk when you go to sell that paper?