How Important Is The Interest Rate on a Seller Financed Note?

In our last post we discussed how not knowing the buyer’s credit can have a negative effect on how much an investor quotes on a note.

Now, you don’t have much control over the buyer’s credit rating, but you do have control over the Interest Rate you set when structuring a note. Below are two scenarios of how the interest rate can affect the cash received when a note is sold to an investor.

Both notes are the same in terms of the buyer’s credit, the down payment and the property value. However, one note is structured with a 6.0% interest rate and the other with an 8.5% interest rate.

The note investor wants a 15% yield-on-investment.

SCENARIO ONE

• Note: $150,000
• Rate: 6.0%
• Term: 180 months
• Monthly Payment: $1,265.79
• Payments Made: 12
• Note Balance: $143,637.50
• Investor Quote: $84,390.65
• Discount: 41.25%

• Note: $150,000
• Rate: 8.5%
• Term: 180 months
• Monthly Payment: $1,477.11
• Payments Made: 12
• Note Balance: $144,826.21
• Investor Quote: $99,163.85
• Discount: 31.53%

As seen above, the note with the higher interest rate receives $14,773.00 more CASH than the note structured at only 6.0% interest rate, 15% more cash to the seller!

Once again, it’s your cash and equity that you’re deferring down the road by offering the buyer special financing.

Always structure your note as if you’ll sell it for cash some day.