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Pros/Cons of Seller Financed Loans?

I just attended the Papersource conference and there were a lot of people buying seller financed notes. Is there any pros/cons to buying seller financed notes as opposed to institutional notes?

Great question!

The biggest consideration for Seller Financed Notes versus Institution Notes is the viability of the documentation & the pricing.

As long as the investor who originated the Note was thorough & comprehensive with their underwriting & paperwork you can be confident that the Seller Financed Note is enforceable. Review the complete collateral document package with an attorney before purchasing so you can be sure they dotted every "i" and crossed every "t".

One advantage of Institutional originated Notes is pricing. A Seller Financed Note is typically performing and requires less of a discount to the Unpaid Principal Balance. The seller originated the loan at Par Value and unless they received some points at closing, they typically won't be interested in taking a loss like an institutional lender cleaning up their balance sheet by selling Non-Performing loans.

Although Seller Financed Notes can be excellent investments when properly vetted, we prefer Institutional Notes for the stronger discounts, wider variety of asset types & enforceable documentation.

This is a great question indeed. The main consideration that I would advise is that you may be dealing with two sides of the note, not just one. Many of the note holders are very closely tied to the transaction and may even have an ongoing relationship with the borrower. This could be tricky. With a bank-originated loan there is little chance that the borrower and lender may have Thanksgiving dinner together. Make sure you know who the lender is and their relationship, if any, to the borrower.

Another consideration is that any seller-finance note holder has received "I'll buy your note" postcards a few times a year. They may have called the post card out of curiosity just to find a buyer wanting a huge discount. My family carried a note on a property. My dad called these note buyers "scalpers". He, like many seller-finance note holders, may be somewhat hostile toward you, a note buyer, from the beginning of your conversation.

Lastly see what you can know about the attorney (hopefully there was one) that drafted the note. They are likely listed as the trustee in a note/deed-of-trust state. I yield to the group to share if it is proper to connect with these attorneys. They will not likely share about anything from a client, but they will likely want to still be the trustee and may be a good neutral party to glean discernment about the note. Beware that they may also be the nephew of the lender...

I have seen great connectivity among human beings through seller-financed deals. I carried my bride across the threshold of a seller-financed house. As a real estate broker, I helped dear friends buy a house. As an auctioneer I saw generational wealth built. It is a great way to buy, sell, and connect value among people. I love the topic!

If you acquire a property and are now selling, carrying terms can yield a higher price too. Learn this tool.