Real Estate Investing Basics

Seller Financed Notes: Finding a Diamond in the Rough

54 Articles Written
land contract diamonds in the rough

How do you know a diamond from a cubic zirconia? Ask yourself that same question the next time you consider a land contract for purchase. Are you buying a diamond or cubic zirconia?

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In the last week I have been invited to participate in several webinars, conference calls, and meetings about buying land contract notes. Therefore it’s only appropriate that we delve into what constitutes a contract worth buying, or better yet, putting a contract under the microscope to identify imperfections.

If I offered you a seller financed note that is due to collect 100 payments of $500 a month at 10% interest would you know how much to offer? Do you know how much the note is worth?

Here are a Few Non-Calculator Items to Consider with Seller Financed Notes:

Paper Trail: In a previous article I talked about the importance of keeping good records when you originate a seller financed note. It is equally as important when it comes time to purchase a note. Here’s what you should want to see: a copy of the HUD settlement statement, a copy of the cashier’s check from the purchasers down payment, and copies of monthly payment checks. It is best to ask if this information is readily available before you do any calculations on the value of the note. Doing so will give you the opportunity to put the information under the microscope.

Buyers: Find out as much as you can about the buyers of the property. What is their credit score? What is their job history? Most importantly, can you talk to the buyers? This last question can really tip the scales in your favor because you can use various techniques to increase your return on investment by working with the buyers. Like a diamond broker, the more you know about who you're working with, the more successful you'll be.

The Asset: When was the most recent appraisal done on the property that the note is based on? To use diamond terminology, you want to know the color, cut, clarity and caret. When I bought my wife’s engagement diamond, I put a level of trust in the GIA certificate. You want to have a recent accredited appraisal that answers the question, “If I had to take the property back, would it enhance or hurt my initial investment?”

Calculating the value of a note with Excel or a financial calculator is often the first of many steps towards purchasing your first note, yet, it’s the paperwork behind those calculations that give you the confidence to make the investment, and make it with confidence.

Photo Credit:  Steve Jurvetson

    Joe Manausa, MBA
    Replied over 9 years ago
    Great advice Kevin. “Find out as much as you can about the buyers of the property.” I bet some of the banks out there wished they had heeded this advice.