Seller Originated Loan Scenario

3 Replies

If a person owns a property outright for say, 100k FMV, could they create a note on this for say 50k @12 % for guaranteed 5 years without prepayment and sale it. Also, is there a way to "wholesale or flip this note" by finding someone who will buy it @ a lower rate and then you keep the difference?

I hope I this makes sense? LOL

Hi Bret, 

Your question does not necessarily make sense the way it is written. You need  to verify which party you are. Are you selling the subject property for 100K and carrying a note for 50K @ 12%? Or, are you buying a house for 100K, giving the seller half in cash, and having them carry a 50K note @ 12%?

Happy Investing

Derek Dombeck

@Bret Nida   I assume you are talking about if you own a free and clear property creating and selling a note secured by it as a way to get cash out of the property?  This is basically private money lending.

Your idea seems like this would work but the challenge you are likely to have is that most note buyers are going to want to see some seasoning unless you have a personal relationship with them.

Those objections might be overcome by creating a 5 year note and selling just the first two years WITH an option for the lender to buy the three remaining years at the back end. You could potentially change the the terms to 1/4 or 2/7 but the general idea is to get the investor a low initial LTV and then, once they see a solid pay history, to get them to commit the balance of the funds. You could try and require it in the contract that if all payments are made on time that they will buy the balance but some lenders might balk at a requirement, an option seems like an easier sell. I think if you make your payments most would renew. I also think you could find private money to buy this for less then a 14% yield.

Good question, it made me think.

I agree the question does not express the identity of the parties well.  

The property is owned free and clear by OWNER.  OWNER can not lend itself money.  The idea to make a note from OWNER to OWNER does not work.  

The idea is a veil over 'borrowing' money from the Buyer of the O to O note.  That investor is the only party who showed up with cash.  That investor is really the lender.  Fairly impractical to expect the capital party to not want a note created with them as a named party.  

Ultimately and in a fairly unorthodox manner it just sounds like you are asking if you can Borrower money using the property up to 50% LTV for a rate of 12% or better. Sure. Probably can get a little cheaper rate with that LTV.

It is not clear what is driving the way the question was asked.  Perhaps clear up the parties so readers have a better idea of what you are trying to do if not this.  

Also, it is always best to keep things simple.  Simple has it challenges all on its own.  

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