Structuring Notes for Top Dollar Pricing

The terms of owner financing dramatically impact the price an investor is willing to pay should the seller ever decide to sell their note, mortgage, trust deed or contract. Use these optimum terms to structure a seller-financed transaction for top dollar pricing.

Down Payment

The more a buyer has invested in the property the less likely they are to quit paying, go into foreclosure, or just walk away from the property. Ideally you would like to see at least 20% down payment, though in today's market 30% is even better. Much less than 20% and investors will severely cut the price, limit to a partial purchase, or decline altogether, depending on credit.

Credit Rating

The credit report reflects the buyer's past payment habits making it a good indicator of how timely they will pay the seller. It is better to keep the buyer's credit score above 680 with an ideal of 700 or higher for the best pricing from note investors.

Interest Rate

The interest rate for seller-financed notes should be 2-4 percent higher than traditional bank loans. With conventional 30-year mortgage rates currently around 6.85-7.04% in early 2025, that puts an ideal interest rate between 9-10% for a standard residential home. Commercial or non-conforming properties would demand a higher rate. Be sure to read the article on "What's the Big Deal with Note Rates?" for more great details.

Term

Interest Only payments are out. The best scenario is to require monthly amortizing payments. A payment schedule based on a 360-month amortization will keep the payment affordable for the buyer. If you choose to include a balloon payment, make it at least 5-7 years to minimize discount effects from the time value of money and comply with current regulations.

Important Note on Balloon Payments

Under the Dodd-Frank Act, if you're financing an owner-occupied residential property (1-4 family), balloon payment rules vary based on how many properties you finance per year:

•       If you finance one property per year, you can use balloon payments with a minimum 5-year term

•       If you finance 2-3 properties annually, balloons are prohibited and notes must be fully amortizing

Consult with a real estate attorney to ensure compliance with current regulations.

Balancing the Scales

One of the advantages with seller financing is that the terms are negotiated and agreed upon by the buyer and seller. Just keep in mind that if the buyer gains too many advantages, the seller will pay with a larger discount or longer holding time should they decide to sell their note.

Think of the negotiating process as balancing the scales. If the down payment is higher, the seller might accommodate by lowering the interest rate. If the credit is poor, a higher down payment and interest rate might be called for.

Just don't end up with a low down payment, interest only, poor credit note or the seller will struggle to find an investor even willing to make an offer. Unfortunately these notes are much more likely to lead to a foreclosure situation that both a seller and a note investor want to avoid.

The Bottom Line

In today's market, seller financing remains a powerful tool—the market reached approximately $28 billion in 2023, up 24% from the prior year. With traditional lending still tight, properly structured seller-financed notes are in demand from investors seeking 9-12% returns.

Structure your note right from the start: 9-10% fixed rate, 20%+ down payment, 680+ credit score, and fully amortizing or long-term balloon payments.

A well-structured note might sell for 95% of its face value, while a poorly structured one could fetch only 50% or less.

If you're considering selling your note or want to know what yours might be worth, Legacy Notes & Co. can help.

Contact us at 862-849-7567 for a free, no-obligation quote.