Seller financing: reading a note the way a buyer of paper does

When you sell a property and carry the financing yourself, you stop owning real estate and start owning a promise. That promise is a note, and it is an asset in its own right. It can be held, sold, borrowed against, or traded.

Most people who carry a note only ever look at it from one side: theirs. The room looks at it the way someone who might buy it would. That is a useful habit even if you never plan to sell.

What a note is, in plain terms

Seller financing means the buyer pays you over time instead of bringing a bank's money to closing. The buyer signs a note, which is the promise to pay, and a mortgage, which ties that promise to the property. If the payments stop, the property is what stands behind the promise.

So a note has two halves. There is the money it says it will pay, and there is the chance it actually does. A buyer of paper is pricing both.

The six things they read first

Hand a note to someone who buys paper and their eyes go to the same places, usually in this order.

1. Face. The balance still owed. Not what the original loan was, but what is left on it today.
2. Rate. The interest the buyer is paying. This is the note's rate, not the rate a buyer of paper wants to earn. The gap between those two is most of the conversation.
3. Payment. How much comes in each month, and whether it pays the note down or only covers interest.
4. Balloon. Whether the remaining balance comes due all at once on a set date, and when. A balloon can make a note more valuable to some buyers and less to others.
5. Position. Whether this note is first in line against the property or sits behind another loan. A second position note only gets paid after the first is satisfied.
6. Payor. Who is making the payments and how they have done so far. A record of on-time payments is often worth more than any single term on the page.

The terms tell you what the note promises. The payor and the property tell you whether to believe it.

Why the face isn't the price

This is the part that surprises people. A note with a certain balance owed is rarely worth that balance to someone else today.

A buyer of paper is trading cash now for payments later. They want a return for waiting and for taking the risk that the payor stops paying. If the note's rate is lower than the return they want, they pay less than face to make up the difference. If the payor is new, or the note sits in second position, or the property is thin compared with what's owed, they want more of a cushion still.

None of that means the note is bad. It means a note has a price the same way a building does, and the price depends on its terms more than its balance.

What changes the value

Because the terms drive the price, small choices made at the closing table can matter years later. Things that tend to make a note easier to sell or trade:

• A real down payment. The more the buyer put in, the more they have to lose, and the more cushion there is behind the note.
• A payment history. A note with a long run of on-time payments reads very differently from one signed last month.
• First position. Being first in line is simpler for everyone to evaluate.
• Clean paperwork. A recorded mortgage, a clear payment record, and title insurance where there should be some.

If you're about to carry a note, talk these through with your attorney before you sign, not after. Seller financing has its own rules, especially when the buyer will live in the home, and your attorney is the one who should decide how yours is written.

What a note can do in a room

A note that pays every month is something plenty of people want. Someone with cash and no wish to be a landlord may want income without tenants. Someone else wants the property behind it. A third person may want to turn their own note into land, or a rental, or a down payment on something bigger.

That's why paper trades well. A note can be offered whole or in part, used as equity toward a property, or be the leg that lets a cash holder in without managing anything. The room asks the same questions it asks of any asset: what do you have, what do you want, and what would you take for it. The answer is often a structure, not a discount.

Any trade involving a note still closes the ordinary way, with each party's own attorney, CPA and lender. If there are tax consequences to selling or exchanging paper, and there can be, that is a question for your own tax advisor.

Where to bring it

GEMS meets the first Thursday of every month, 9 AM to noon, at Trailblazer Brokerage in Greenville. Members bring property, cash, notes and opportunities, and the room looks for ways to trade what you have for what you want. Your first two sessions are free.

If you hold a note, bring the six facts above written down. That is enough for the room to start reading it the way a buyer would.