Structuring Notes for Top Dollar Pricing

The terms of owner financing dramatically impact the price an investor is willing to pay should the seller ever decide to sell their note, mortgage, trust deed or contract.  Use these optimum terms to structure a seller financed transaction for top dollar pricing.

  • Down Payment – The more a buyer has invested in the property the less likely they are to quit paying, go into foreclosure, or just walk away from the property.  Ideally you would like to see 30% equity or down payment but realistically it will likely range between 10-20%.  Much less than 10% and investors will severely cut the investment to value, limit to a partial purchase, or decline altogether, depending on credit.
  • Credit Rating – The credit report reflects the buyer’s past payment habits making it a good indicator of how timely they will pay the seller.  With the sub prime mortgage crisis, it is better to keep the buyer’s credit score above 625 with an ideal of 675 or higher.
  • Interest Rate– The interest rate for seller financed notes should be 2-4 percent higher than traditional bank loans.  That puts an ideal interest rate between 8-10% for a standard residential home based on today’s market. Commercial or non-conforming properties would demand a higher rate.  Be sure to read the post on What’s the Big Deal with Note Rates? for more great details.
  • Term – Interest Only payments are out. The best scenario is to require monthly amortizing payments with a balloon payment.  A payment schedule based on a 360 month amortization will keep the payment affordable for the buyer. While a 5-7 year balloon will shorten the term and minimize the discount effects to the seller that come from the time value of money.

One of the advantages with seller financing is that the terms are negotiated and agreed upon by the buyer and seller. Just keep in mind that if the buyer gains too many advantages, the seller will pay with a larger discount or longer holding time should they decide to sell their note.

Think of the negotiating process as balancing the scales.  If the down payment is higher, the seller might accommodate by lowering the interest rate.  If the credit is poor, a higher down payment and interest rate might be called for.  Just don’t end up with a zero down, interest only, poor credit note or the seller will struggle to find an investor even willing to make an offer.  Unfortunately these notes are much more likely to lead to a foreclosure situation that both a seller and a note investor want to avoid.


About Tracy Z

Tracy combines her knowledge of cash flow notes with the power of marketing online to help grow your business! She can be reached at 1-888-999-7905 or at Exposure One Marketing.


  1. im new at this indusrty and i want to know if i bought the personal profit series. would i need to buy the scrips and tips book as well. or would you reccmend me to get all of the material at one time

    • Hello Antrone! The Personal Profit Series is a complete how-to manual with over 475 pages. It includes all the information and resources for getting started in the owner financed note business. There are other materials you might decide to add to your library over time including Every Single Marketing Idea and the Scripts and Tips you mentioned. However, in my biased opinion, the best place to start for a reasonable cost is the Personal Profit Series – Your Complete Money Making System to Buying, Referring, Creating, and Holding Real Estate Notes. We have some great testimonials including the following:

      “As a note broker, for the past 18 years I have purchased many publications on the subject of seller-financing and note brokering. Without hesitation, I highly recommend Tracy & Fred Rewey’s “Personal Profit Series: Notes” (PPS) to any one in the note business, from beginners to seasoned veterans. I keep a copy on my desk and refer to it often. For my money, PPS is the most comprehensive, thorough, detailed, and well-written book on the subject of privately-held notes, I have come across.” – Kevin O’Connor from Charlottesville, VA

  2. I’m looking for a way to make money off of mortgage notes. i want to learn how this business works. do I have frist locate a note , then buy it, then post it wait for a buyer then sell it. how does it work.

  3. Jeffrey Smith says

    Many note buyers also look at the total Investment To Value (ITV) for the note purchase price. The ITV is calculated as the sum of the senior debt that is remaining on the property after the note purchase PLUS the purchase price of the note, and that sum is divided by the current fair market value (FMV) of the property to calculate the ITV ratio. Conservative note buyers want to see an ITV ratio of not more than 70% of FMV. That means there is about 30% protective equity in the property that can serve as a buffer in the event of a foreclosure. Almost all of the protective equity will be consumed by foreclosure costs (paying off senior debt and penalties, renovating the property, reselling costs, etc.).

    The protective equity should consist of about half cash down payment with the remainder as a seller-held junior note that is kept for cash flow. Less cash down payment means the borrower has less invested and less to lose by walking away from the property.

    Simultaneous closings that sell the property on a seller note and a note buyer simultaneously funds the note purchase to pay off the existing liens are rare these days. Most note buyers are requiring deeper discounts and much more documentation to verify value and borrower credit worthiness. It’s often simpler for the seller to keep the wrap note for 6 to 12 months to provide a verification of mortgage payments (seasoning the note) before attempting to sell the note.

    For example, a property with FMV $200,000 has $120,000 existing debt (60% FMV). The property is sold for 10% down, 70% seller wrap-around, 20% seller held junior. The seller will likely choose to season the wrap note for as long as the existing senior lien holder will allow (6 to 12 months should be negotiable) in the case of a “due on sale” clause. With adequate seasoning, the wrap-around note (70% FMV) could be sold for a nominal discount to pay off the 60% FMV underyling lien with a little cash left over for the seller. That left over cash plus the down payment plus the junior note cash flow will likely total more than the original equity in the property at the time of the property sale.

    On the other hand, highly leveraged properties will probably require the seller to hold the wrap-around note for a long time to reduce the underlying debt to an ITV ratio that is acceptable to a note buyer. Charging an interest rate that is higher than the underyling debt and devoting the extra interest income to principal reduction of the underyling debt will speed the reduction the ITV ratio.

    If you intend to hold a wrap-note, then be sure to discuss the tax consequences of the principal and interest income with your Certified Public Accountant.

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