Understanding Seller Financed Notes

[Steve Burt]

Just wanted to check my understanding on seller financed notes. I have noticed in recent weeks and months the amount of seller financed notes listed on PaperStac has increased dramatically. Does anyone have an idea as to why?

Here is an example. My understanding is these are essentially people who are refinancing their own home or rental property without the use of a bank. My initial hypothesis has been to steer well clear of these notes because if an owner could use a bank to get refinancing or a HELOC then they would do it because this would afford them better rates.

In the linked example, the description is just written strangely to me but I am not sure if that is from my own lack of understanding. The 2 "buyer success" programs are difficult to parse. The Thousand Keys website looks like it was set up yesterday and the yield seems to good to be true. Looking up the property on zillow and it looks in my estimation to be terrible, there is no way a bank would extend financing on that. On top of it all, Ohio is a state where foreclosure can take up to 18 months. I was just wondering if the experts on this forum share my reservations so I can tell if I am on the right track.

I spoke at length about one example, but I do think this is highly illustrative of the type of seller financed notes that are hitting paperstac lately and hope this topic can be an informative discussion on whether these have unique pitfalls and risks.

[Logan Hassinger]

@Steve Burt

Your assessment of a seller financed note is fairly skewed. You stated that if a borrower could qualify for traditional financing and better rates, then they would. So if borrowers can’t qualify under traditional underwriting, then they are simply left to rent? That’s not how it works. 

Seller Financing plays a great role into providing housing for families with less than optimal credit history, DTI's and typically lesser income.

Whether a bank note or a seller financed note, I have to be willing to own the property at the end of the day. Every note is different and you can’t apply a blanket statement of “stay clear away from seller financed notes”. 

I’ve bought notes of both types and I’ve purchased seller financed notes over bank notes many times. 

You also need to look at buying a note from the sellers perspective. Although in your example the yield is 18% and may seem to good to be true for you, you don’t know what the seller bought the note for. If they acquired the note for 10-15 cents on the dollar and are now selling for something more and that that provides them with sufficient profits and subsequently provides an 18% yield then to me that’s how it shakes out. In general a seller financed note should carry a rate of at least 9-10%. As the note gets traded the achieved rate is going to bounce around but typically ends around 15%-20%.  So with your example showing an 18% yield isn’t alarming to me but I would want to investigate the property more closely and have a BPO performed and talk to a local PM to better understand the market. 

Remember you’re not just buying the note, you’re buying into the market.