The size of the seller-financed note market

[Charley Gates]

I just finished Jimmy Napier's book, "Invest in Debt."  In Chapter 2, he states that, in 1982, the size of the seller-financed note market was $75B. 

I believe that the current size of the seller-financed note market is $25-$30B.  

That's quite a large decrease especially considering that $1 in 1982 would have the purchasing power of about $3 in today's market.

One explanation could be that Interest rates were artificially low for a long time (until recently) which may have diminished the need for seller financing. 

Any other thoughts on the difference in the size of the seller financed note market?  

[Don Konipol]

Quote from @Charley Gates:

I just finished Jimmy Napier's book, "Invest in Debt."  In Chapter 2, he states that, in 1982, the size of the seller-financed note market was $75B. 

I believe that the current size of the seller-financed note market is $25-$30B.  

That's quite a large decrease especially considering that $1 in 1982 would have the purchasing power of about $3 in today's market.

One explanation could be that Interest rates were artificially low for a long time (until recently) which may have diminished the need for seller financing. 

Any other thoughts on the difference in the size of the seller financed note market?  

I actually had quite a long discussion with Jimmy Napier on this and similar topics back in the very early 1980s, LOL
Jimmy was quite an entertaining fellow beside being, at the time, the ultimate authority on ‘working’ a note purchased at a discount.

mortgage interest rates actually touched 18% in 1981.  As such very few people qualified, or could afford to make the payments on a mortgage.  New types of mortgage loans were introduced, such as graduated payment, tiered interest rates, adjustable, negative amortization, etc.  Still, the market was extremely unbalanced.  High inflation made it unclear whether one was making money or losing money.  

The way most property was transacted was loan assumptions, including subject to, owner finance, or a combination of those two.
Most loans originated prior to 1980 were assumable without lender approval.  But prices of houses had increased substantially in the prior 6 years. So, while many properties had assumable mortgages in the 6-7% interest rate range, there was a large gap between property sale price and the assumable underlying mortgage note balance.  To move the properties at anywhere near asking price or even market value, the seller would need to either carry back a second or do a wrap around.
For some reason the second were usually carried at 9-10%, with the wraps in the 7-8% range. For properties sold with no existing mortgage, owner carry firsts were usually 6-8% to make the deal work.
This presented a once in a lifetime opportunity for note investors who thoroughly understood time value of money, interest rates, and present value calculations.
When you could get 16 - 18% interest  in a Federally insured jumbo CD issued by a Savings and Loan a private mortgage note with a 7% rate is going to sell for a very significant discount to unpaid balance. And once a note investor buys this note at a very large discount IF he gets paid off early, his return is going to be sky high since the time period he’s receiving the difference between the purchase price and the outstanding principal is compressed.
Jimmy Napier was expert at finding ways to entice the property owner to either pay off the note early by refinancing or pay additional payments monthly. One of his favorites was to offer to halve the interest rate if the borrower would double his monthly payments. Of course Jimmy would show the borrower exactly how much he'd be saving in interest. Since we were buying recent notes at about 60% of outstanding balance or less, and the average stated note balance was 9%, by lowering the interest to 4.5% and doubling the monthly payments we increased our ROI about 10 percentage points on an annual basis, from about 16-18% return to 26%+.

Back to the point home sellers actually expected they’d be carrying “paper” in order to sell their property back then.

Jimmy Napier was also expert in Florida property tax certificates, mobile home investing and real estate “exchanges” in which property is exchanged, sometimes in as much as a nine way exchange.  Jimmy would always be on the lookout for low cost “recreational” lots he could purchase in bulk for almost nothing.  He’d use these as “boot” in a trade or add cash to obtain ownership of more desirable real estate.  

Thanks for bringing back the memories.