Will this seller finance deal be a potential note for sale in the future?

5 Replies

I am selling a property with seller financing. I don't know how to estimate what this might be worth to sell as a note in a couple of years if the payments are made on time. Here are the details:

Original loan: $28,000 at 6% for 12 years.

House: 3BR 1BA SFH in small town in IL. Not a lot of sales so hard to estimate value. Maybe in the $35,000 range after the repairs that are being done currently.

Buyer has fair, not good, credit.

I plan to have a loan processing company handle the collection of payments and escrow. After 18 months or so when the balance due is around $25,500 is it reasonable to expect to get over $20,000 or is that out of the question? What is the determining factor for what the note would be worth? House value? Loan balance? Buyer credit? Other?

I just talked to Dave Franecki at Capstone Capital http://capstonecapitalusa.com/.

He seemed to be straight shooting and part of his business is finding buyers for loans like yours.  Presumably he wants to sell them to me.  But his website offers free analysis of loans people want to sell. 

All of the factors you mention will affect the value of the note as will the payment history when you try to sell it.

The severe penalties detailed in Dodd-Frank, the SAFE Act and the CFPB rules have made seller financing very risky for the lender. If the rules are not followed properly when the loan is originated the risks will be passed on to any future buyer of the note. An improperly originated note will be difficult to sell. It may be wise to contact a lawyer who is well versed in these laws before proceeding. The rules are relatively new and many lawyers do not yet know their scope.

The post is a little unclear with some details that may be of importance.  The property value is not known yet a loan is made for $28k and we 'think' it might be worth $35k?  What is the actual contracted sale price?  

Get an appraisal either when the repairs are completed or get a subject to repairs appraisal.  A formal full appraisal by a certified appraiser.  Add it to the file and keep it with the file.  You can give a copy of the report to the Borrower and have the Borrower acknowledge receipt.

It is difficult to tell if there is a down payment involved.  Perhaps a portion may be deferred due to repair needs.  Both numbers, down payment and rehab capital would be good to know here.  The repair number might lead to more questions around what is being repaired.

The Buyer's occupancy is not mentioned.  Is the Buyer an investor, purchasing this property for investment purposes or will the property be the Borrower's primary residence?  That matters.

While some of the answers to the above questions/missing information will influence the loan in general that interest rate is probably a little low.  Would be a little better closer to 8% or so.  In general the loan will likely have to be held to maturity as the Borrower will have barriers to refinance due to it's low balance.  A 22% discount (bid at $20k) will bring a decent yield to the investor but with out being able to reflect on the real underlying risks it is not clear if that yield is proper in relation to the risk the loan will carry.  

The core idea missing is we do not understand the Borrower's capacity or incentive to pay the obligation. Your idea of "fair" credit and mine might be two different ideas. (Not asking to disclose any further detail on credit) Further, it is not clear how you obtained credit. The Borrower's payment is $274, we do not understand if there is an impound demand nor the numbers that go with it. We do not understand how that PITI looks against the Borrower's income. Did you look at their income? What is the debt to income ratio? (divide PITI by income) Not a bad idea to have a little story behind the "Why this Borrower" from you. Was it just the first person to come along. Did this person have some redeeming factor like repair skills or alike? Since you do not formally underwrite loans having some insight from your perspective just helps fill in some gaps that you may not have documented well in file but saw in process. After all, when a note sells what is being sold is the potential of future payments from the Borrower so having an idea why he/she will be successful is fairly relative.

A "loan processing company" is not who should be handling collection of payments or escrow accounts.  Seek a Mortgage Servicing company.  Servicing loans as a third party in all 50 states is a licensed activity.  Processing a loan is not Servicing a loan.  Processing is activity related to origination. Speaking of origination who took care of those duties?  Did you use a loan officer or company or did you do this all yourself?  

Giving you an idea if the loan is sound and made well and has the potential to be sold in the market with a relatively low discount is something the forum can give you some general insight into.  Obviously the world will be a different place 18 months from now and the actual performance will greatly influence an actual bid in the market place.  There is merit to this discussion as I think many Seller Finance Notes need some direction in expectations.  Knowing what is good about the loan and what is bad about the loan will help you determine what is fair to you and any potential buyer if a sale takes place in the future.  If you can update some of these questions we can update the feedback.

Shera, 

 A note buyer looks for down payment amount, buyer's ability to repay, value of collateral and payment record.  Your interest rate is probably too low.  Check prevailing rates by local investors/originators.  A person buying a house in that price range is only concerned about monthly payment so get them as high as the person can reasonably afford so that the amortization time is lessened thus enhancing the resale price for you note.  Good Luck!