Selling Seller Financed Notes

14 Replies

Is it possible to sell seller financed notes? If so, who would be the buyer of the note and what are the standard guidelines one looks for? i understand this is something a lot of investors do in the Houston market but would in work in other markets such as Memphis? 

Certainly. I buy frequently. Some factors I consider.

Are payments collected by an independent third party? Is there title insurance on the note? How is the note secured? Is the note seasoned? Are the note documents properly prepared? And of course, how much do I have to pay for the note?

Hope this helps. There is more, but this is a start.

This post has been removed.

The above comments hit all the points.  There is a very active market for these notes but the price you get will depend on a variety of factors as mentioned above.

One key factor is the LTV, If you have a new note without a lot of seasoning and/or a high LTV you can sell a portion of the payments, this lets you get some money out of the note and avoid the larger discount that comes with selling payments farther out in the future.

Cameron,

Are you creating the notes yourself or do you broker notes created by other sellers?

Every investor has their own guidelines based on what they feel is important. There really is not any standard.

I think Memphis would work every bit as well as Houston. If you are brokering, you probably need to expand your market since Houston is a much larger area and produces many more notes then Memphis. You would have much less competition in Memphis then Houston.

Good luck

Originally posted by @Scott Arpan :

Cameron,

Are you creating the notes yourself or do you broker notes created by other sellers?

Every investor has their own guidelines based on what they feel is important. There really is not any standard.

I think Memphis would work every bit as well as Houston. If you are brokering, you probably need to expand your market since Houston is a much larger area and produces many more notes then Memphis. You would have much less competition in Memphis then Houston.

Good luck

Scott I'm looking to create the notes myself, and sell them months after origination if that's possible

Originally posted by @Joseph Ball :

Certainly. I buy frequently. Some factors I consider.

Are payments collected by an independent third party? Is there title insurance on the note? How is the note secured? Is the note seasoned? Are the note documents properly prepared? And of course, how much do I have to pay for the note?

Hope this helps. There is more, but this is a start.

Joseph, I currently don't have any notes originated at this time. But the ideal payment collection would have the funds wired directly into the lenders account. I would defiantly have title insurance on the note, with the note being secured by deed of trust. 

I would like to sell the note at 70%-75% of the loan balance, after holding it 2-3 months. 

@Cameron Ellis 

Talk to your investors before creating the notes to confirm everything you do complies with their requirements. I am assuming you are selling homes and creating paper. Notes on other property types will be different. You will need to ask your potential investors about:

  • Having your notes comply with DF.
  • What loan terms and down payment will give you the highest possible price.
  • What they are looking for with the buyers so your investor will be comfortable with them when you sell the note.
  • What documentation they need to feel comfortable any rehab/repairs you made to the property were completed properly.
  • Do they want a specific servicer to be used or perhaps none at all? Many investors require notes they purchase be serviced by them internally or their hand-picked servicer. Or it may not make a difference if only the buyer is paying servicing fees.

Some investors will ask why are you creating the note and holding it instead of cashing out at sale. If the answer is banks will not finance most properties in the neighborhood, don’t expect the investor will be very interested either. A partial will be the only option.

Investors will not commit to buying anything you book. If the market suddenly changes, notes you are holding may not bring the price you hoped for.

I am sure others will add to this list.

A note buyer may not be comfortable with your assurances that payments were made on time. Even bank statements can be manipulated. Third party servicers give an added measure of security.

You can furnish all of these conditions or none. The more you supply, the lower your discount may be. 70% to 75% of loan balance after 2-3 months may not be a reasonable expectation. Much depends upon how many conditions you can meet.

i think it is often preferable to sell a portion of an income stream, rather than all of it.

Well an important point not mention thus far is licensing as a lender.  If you plan to do this for several properties you will be in the business and I am guessing based on the details in the thread you plan to sell to primary users.  So you will likely need a license.  You are lending in equity.  You should do some research on SAFE Act, Dodd Frank and state usury laws.

Also, it is a little concerning that you want to sell the note at 75% of the balance.  Financing does not increase the value of the collateral.  Usually when folks start talking about taking haircuts like that they have inflated the value to the Buyer/Borrower.  Not a practice you really want to mess with.  

Proper servicing is not just a matter of payment accounting it is a matter of regulation.  The Borrower has legal protections which deal with proper servicing practices.  The simple moral of the story there is you don't know what those are so you will want to hunt down a licensed servicer.  In the scheme of things for right now this is low on the list as there is likely much more you need to know and learn before you get to that detail.  

Need to search for a thread "What do you want Mr. Note Buyer" it's rather long and is about a condo note being sold, but it applies to your inquiry. If this is to be your business model then you'll need a RMLO to originate the loans. If you do any rehab on the property you'll need a license as different rules apply to contractors/rehabbed properties. You'll need to comply with Dodd-Frank being in the business, assume you'll do more than 3 deals a year.

I suggest you hold the note over a year, 14 to 18 months as the seasoning will be worth the difference. I'd also suggest you obtain an appraisal, which will probably be required, this will aid in your sale. :)

Originally posted by @Dion DePaoli :

Financing does not increase the value of the collateral.  Usually when folks start talking about taking haircuts like that they have inflated the value to the Buyer/Borrower.     

The value of property is dependent on the availablity of financing. If there is a dearth of financing, values will be low then when there is an abundance of financing. During the crash, there were thousands of REOs sold at an artificially low price because banks wanted cash and there were relatively few cash buyers. When lending came back, prices rose. The properties didn't change, the financing changed. 

There are still some places where banks are reluctant to lend so prices remain artificially low. Investors who can buy for cash and sell with financing are adding value, to the property, homebuyer, and neighborhood.

John, have no idea how to correct your thinking as it is wrong. Availability of financing effects the market, not the value of one property! Financing does not increase the value of any property, house, office building, skyscraper, no individual property. You will never ever see an appraised value of a property being higher giving any additional value based on financing. Intrinsic values can not be measured in the real estate market.

Raising the value simply by offering financing is a predatory practice by law!

Does dealer financing for a new car raise the value of that car? NO! In fact, if the dealer can finance it, they will lower the price as they earn income from the financing.

We don't use guru based thinking on BP. 

Other than that, Happy New Year! :) 

Originally posted by @John Lowe :
Originally posted by @Dion DePaoli:

Financing does not increase the value of the collateral.  Usually when folks start talking about taking haircuts like that they have inflated the value to the Buyer/Borrower.     

The value of property is dependent on the availablity of financing. If there is a dearth of financing, values will be low then when there is an abundance of financing. During the crash, there were thousands of REOs sold at an artificially low price because banks wanted cash and there were relatively few cash buyers. When lending came back, prices rose. The properties didn't change, the financing changed. 

There are still some places where banks are reluctant to lend so prices remain artificially low. Investors who can buy for cash and sell with financing are adding value, to the property, homebuyer, and neighborhood.

 OH BOY - NO - NO - NO - NO

Property value has an affinity to supply and demand curves.  When credit is loose demand rises which pushes up prices relative to supply.  When credit is tight demand falls since less folks qualify for a loan thus downward pressure on price also relative to supply.  

FINANCING DOES NOT ADD VALUE - never has and never will.  

That is the type of wrong and silly thinking that will get investors in trouble.  Usually being spit out by folks trying to justify inflated values with Seller financing.  

A property purchased for $100 does not become $101 because it is financed. 

I will also point out REO was not given away for cash. REO sales have to offset loan losses. A Seller of any property receives cash at closing it doesn't matter if the property is financed or paid in cash.

You are going to want to clean up these gross misunderstandings as courts of law don't spend a bunch of time explaining things.  

Join the Largest Real Estate Investing Community

Basic membership is free, forever.