Why I am Leery of Seller Financed Paper / CFD's which are Non Performing

[Chris Seveney]

Recently the CFPB came out with an opinion on contract for deeds / land contracts etc and one of the issues discussed in them is the lack of appraisal and inflated valuations. For those who invest in seller financed paper. Here is a great example why.

I recently saw this asset come across my desk which was a non performing loan where the seller was a year behind (they made one payment I believe - even though they were allegedly properly underwritten). The balance of the loan is $85,000.

The seller was looking for around $40k for the loan.

What sticks out? Well the fact that this loan could not sell on the market for $37,000 has me believing that this property is not worth near $85k and not even at the $40k the seller is asking. The property is probably worth $25k-$30k.  So if a note investor bought this for $40k, spent $10k to foreclose and be in it for $50k and end up with a $25k property - they will not be in business long. 

So my cautionary tale is when buying seller financed paper, make sure you are very in tune to the value of the property.

PS: Even if this started out as performing, same concept applies - make sure you know the numbers/values of the property.