Tired of Slow Returns from Seller Financing? Here’s the Shortcut You’ve Been Missing

When I started offering seller financing on my properties, I thought I had found the perfect way to generate steady income and sell properties faster. But after years of waiting for borrowers to pay off their loans, I realized one of the biggest drawbacks of selling properties with owner financing: my money was tied up, which hindered my ability to reinvest and grow my business.

(Full Blog Post: REtipster.com/sell-your-notes)

It felt like a Catch-22. Seller financing helped me sell properties for higher prices and collect interest, but the slow drip of payments limited my cash flow. I wanted a way to get my money back sooner without losing the benefits of seller financing.

I know I'm not alone in this dilemma, and that's why I wanted to explain when, where, and how a real estate investor can sell their notes. This can unlock the cash we need now rather than waiting for years to collect it.

It's not always the perfect solution, but it can be a great way to get your money back quickly, keep the momentum going, and avoid the headaches of managing loans. In this episode, I’ll explain how it works and the key factors to maximize your returns when selling notes.

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Transcript

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Music.

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Hey folks, this is Seth. How's it going out there? Welcome to the REtipster podcast.

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In this episode, I'm going to share with you a monologue of sorts.

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So what you're about to hear is actually a lesson from the seller financing masterclass.

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And the name of this lesson is the ultimate exit strategy for seller finance deals.

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So the reason I put this together was because I know for myself,

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one of the biggest problems that I've had historically with seller of financing,

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and this is true for many land investors I talk to, is the issue of how long

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it takes to collect all of your profit in the deal.

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Now, you can obviously mitigate this by collecting a much higher down payment

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and that kind of thing, but the higher down payment you get,

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while it does certainly lower the risk in the deal, it also sort of starts to

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get in the way of the whole benefit of seller financing for the buyer.

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Because for many buyers, what they want is to put as little money down now as

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possible and then make those payments over the long term.

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So inherently, one of the ever-present issues with seller financing for the

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seller is just the whole fact that, hey, I want to get my profit now.

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I don't want to wait years to collect this. And that was why I wanted to make

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this lesson was because something not every seller realizes is that you kind

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of can collect most of the cash up front, even when you're selling the thing with owner financing.

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And you can do this by selling your note either immediately after you close

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or waiting a little while and then selling it. Whenever you decide you want to cash out and move on.

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And when you sell your note, you have to take a little bit of a haircut on the

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balance of the loan when you sell it.

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But if you can get past that, you can effectively collect most of the cash that

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is owed to you now instead of waiting for months or years to get that.

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And as with anything, there are some pros and cons to this.

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It's not a black and white, all good or all bad thing. But it's really helpful to understand.

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First of all, how you do this and also what you can do now when you close new

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deals to set yourself up so that if and when you want to sell that note,

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you can sell it for as much as possible.

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I just want to explore this idea with you because a lot of land investors are kind of blind to this.

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They either don't know that they can do it or if they do know they can do it,

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they still don't really understand the mechanics of how to do it or why they

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should do it or where they can go to do this, how they can do this relatively easily.

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So we're going to cover a lot of that right here. Again, if any of this is interesting

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to you, if you're somebody who has kind of wanted to do seller financing,

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but you've been apprehensive about it because of this issue of how it takes

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so long to get your money, or maybe you already are doing seller financing,

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but you're kind of doing it begrudgingly because you just have to,

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and you can't sell properties any other way, and you still want your money.

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Now we cover this in a whole lot more in the seller financing masterclass. If you're interested,

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head over to sellerfinancingmasterclass.com. We are actually running a huge

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sale on this right now. You can get it at a giant discount if this is something you're interested in.

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I think you'll find a lot of value and useful information in this episode.

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So I hope you listen in and hope you find this useful.

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Music.

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When I started selling properties with owner financing, I wanted to create as

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many streams of recurring income as possible to give my business financial stability

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and predictability for years to come.

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It made plenty of sense on paper, but I started to get frustrated after selling

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many of my properties this way.

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Having so much of my profits stuck in limbo while waiting for borrowers to pay

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off their loans was really slowing me down.

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Seller financing was a great tool for selling properties faster and for higher

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prices, not Not to mention, you know, the added profit from interest and all that.

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But when my net proceeds were trickling in at a snail's pace,

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I couldn't redeploy those dollars and make more money from that.

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There was a big opportunity cost associated with this. Kind of felt like a catch-22

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where I wanted to have my cake and eat it too.

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And eventually, the day came where I gave up on seller financing.

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Even though there was an undeniable benefit to selling my properties this way,

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I was just tired of waiting for my money to arrive each month.

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Unfortunately, I wasn't aware that there was a relatively easy way to utilize

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seller financing and pull my cash out of each deal quickly. How is this possible?

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Well, we can do it by selling our notes. So in the early days of my land business,

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part of my struggle with seller financing was that I didn't realize I could

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actually have my cake and eat it too.

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All I had to do was sell my notes.

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Let's say I just sold a property for $50,000.

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When we closed down the sale, I collected a $10,000 down payment from the borrower, so 20%.

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And then we set up a loan for the remaining $40,000, which the borrower agreed

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to pay off over the next five years or 60 months at 10% interest.

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Now in doing this, I created a stream of income that would pay me approximately

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$849.88 per month for the next 60 months.

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60 of these payments came out to a grand total of $50,992.91.

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Now keep in mind, my sale price was $50,000 even.

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So that's an additional $992.91 of profit because of the interest I was charging.

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That's a 27% ROI, which is pretty good considering this is passive income.

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And this is on top of an already very high 155% ROI I got because I bought the

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property for $20,000 and then sold it for $50,000.

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So all around, it's a great deal, but it's It's important to understand the

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value of income streams.

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In case you didn't know, there are a lot of other investors who want this kind

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of passive income that these kinds of notes can provide, and they're willing to pay for it.

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They don't want to do the work of finding and closing on deals like you already

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did, but they do want the streams of income that you've created.

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And if you know where to find these kinds of note buyers, it's not hard to sell your notes to them.

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The only catch is that you'll almost certainly have to sell your note at a discount.

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This could be a small discount or a large discount.

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And the size of the discount depends on a number of factors,

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which we'll get into in just a second here.

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Either way, the benefit of selling your note now is that you don't have to wait

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around to collect all these monthly payments.

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You can take your cash and pour this fuel back into your cash generating machine

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while that note buyer comes in and steps into your place of being stuck,

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holding the bag and waiting for the rest of the payments to come in.

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Of course, the note buyer actually wants to be stuck in this position holding

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the bag because they don't need their cash back now, or at least not yet.

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Their whole objective is to find an investment like the note you created that

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will perform and deliver a good ROI while they're holding it.

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Once your note is sold to this note investor, the remaining loan payments will

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go to them instead of you.

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Likewise, after your note is sold, if the borrower ever pays late or stops paying altogether.

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It's that new note buyer's problem to figure it out, not yours.

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As with anything, there are some drawbacks to selling your notes instead of

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just waiting it out and collecting all the payments yourself.

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In my mind, there are only a couple of real cons to selling a note like this.

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First of all, you're losing the income.

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So if you enjoyed having your profits trickle in each month,

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that's going to stop after your note is sold.

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Even though you will walk away with a good portion of the remaining loan balance,

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you are going to lose whatever stability or predictability those monthly payments provided you.

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There's also going to be some loss of principle.

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In almost every scenario, when you sell a note, you will not get paid 100% of

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the remaining loan balance.

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In the best case scenario, if the property is perfect,

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if the borrower is perfect, if the documentation is perfect,

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if you set up everything perfectly and there is a well-documented track record

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to prove that the borrower has made their payments on time, every time.

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At the high end, you could probably expect to receive about 80% of the loan

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balance at the time of sale.

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And you could potentially make even more, but it would be pretty unusual.

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That would only happen if the interest rate was very, very high and it was an

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extremely low-risk deal.

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I think in the vast majority of cases, it would be pretty rare that it exceeds 80%.

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And if anything, it would be even lower than that, depending on what kinds of

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risks are inherent in the deal. Especially if you're dealing with something

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like land, it would be much more common for that buyout price to be well below

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80%, just to give you a frame of reference.

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Now, on the other hand, if the property has problems, if the borrower has problems,

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if the borrower has missed payments, in other words, if this is a non-performing

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note, and or if the loan documentation has problems, you might not be able to

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find any note buyer for this kind of deal.

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At best, you might find a buyer, but they're probably only going to be willing

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to pay a much lower percentage of the loan balance.

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Like we're talking somewhere to the tune of 30 to 40% of the loan balance.

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Even with these drawbacks, many investors are still happy to cut their losses

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and collect their cash sooner rather than later.

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Why? Because if you understand the concept of net present value or NPV,

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the money you receive today is generally more valuable than the money you'll earn years from now.

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So why is it so important, this fact that you have the option to sell your notes?

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Well, the ability to sell your notes is kind of a big game changer.

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If you're like me and you get kind of frustrated waiting around for ages to

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collect all of your loan payments, well, this is great news because you don't have to wait anymore.

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If you're willing to take a small haircut on the loan balance when your note

00:09:39.307 --> 00:09:43.967
sells, you can get your money back a lot faster so you can keep your money machine running.

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You can also take advantage of the many benefits of seller financing for the seller.

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That's you in this case, because you're the seller who created this note.

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You can still sell your properties faster and for more money because you're

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making your property available to a lot more people who otherwise wouldn't be

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able to get financing at all.

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And with vacant land properties, this is especially important because financing

00:10:05.587 --> 00:10:08.887
is a notorious problem when buying vacant land properties.

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Now that you know about this exit strategy where you can sell your notes,

00:10:12.607 --> 00:10:15.707
you might as well start planning for it as soon as possible, right?

00:10:15.847 --> 00:10:18.647
So that you have the option to take advantage of this if you want to.

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I mean, even if you have no intention of selling your note, what if your plans change?

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I mean, what if you get tired of waiting around for your cash to show up?

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If there is even the slightest chance of selling your note someday,

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day, you might as well do what you can today to ensure those notes can fetch

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the highest possible price, right?

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If you're listening along and nodding your head, then you might be wondering,

00:10:40.247 --> 00:10:43.147
okay, Seth, how can I sell my notes for the highest possible price?

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Well, if you want a higher percentage of your remaining loan balance when you

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sell, then you need to understand and then deliver what a note buyer wants to

00:10:51.867 --> 00:10:55.267
see when they buy a note. Okay, so what do note buyers want?

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Well, let's put ourselves in the note investors' shoes for a moment.

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If you were trying to buy a source of income, you'd probably want to be pretty

00:11:04.187 --> 00:11:07.667
confident that the money is actually going to come in as planned, right?

00:11:07.847 --> 00:11:12.407
I sure would. Well, the best way to get this assurance is to verify that the

00:11:12.407 --> 00:11:16.887
borrower is reliable and has the financial means to continue making those payments,

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because that's what this all hinges on, is that the borrower has the money and

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they're actually going to pay.

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And this is what I discussed at length in two separate conversations with Max

00:11:26.047 --> 00:11:30.067
Bailey from Call the Underwriter and Eric Chiraga, who's a pretty well-known

00:11:30.067 --> 00:11:31.807
note investor in the land space.

00:11:32.067 --> 00:11:34.347
So if you haven't seen those yet, be sure to check those out.

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They provide a ton of detail about how to screen your borrowers and how to set

00:11:38.347 --> 00:11:42.547
up these notes so that you can sell them for the highest possible resale value.

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So getting confident about the borrower's ability to repay is one huge factor,

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but what if the borrower isn't reliable?

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Or what if you don't feel confident that the payments will come in as planned?

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Or worse yet, what if the borrower disappears off the face of the earth,

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and you have to go through the work of repossessing the property?

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How difficult or time-consuming or costly will this process be?

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Would that scare you off and kill the deal if you were a note investor?

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Well, if you, as a note buyer, see a lot of red flags when you're evaluating

00:12:12.696 --> 00:12:16.696
a note deal, it's going to change how much you're willing to pay for that source

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of income. And if it gets bad enough, it could be a deal killer altogether,

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depending on your risk tolerance.

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If the note seller can't clearly demonstrate that they're selling a quality

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product, in other words, a source of income that can be relied upon,

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then a note buyer won't be willing to pay as much.

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This lack of certainty lowers the value of the note. And it works the same way with any product.

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This is why any sane person is willing to pay significantly more money for a

00:12:44.116 --> 00:12:48.036
brand new car as opposed to an old, beat-up, used car.

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A new car is much more reliable than the old beater with obvious signs of wear and tear.

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The reliability of a new car is worth a lot.

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Another important value booster for a note when you're trying to sell it is

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using the appropriate documentation when the loan is closed in the first place.

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If that borrower ever stops paying, will the holder of that note have the legal

00:13:09.756 --> 00:13:13.316
right to repossess or auction off the property if they need to?

00:13:13.416 --> 00:13:17.156
Is it going to be a seamless process or is it going to be a total nightmare

00:13:17.156 --> 00:13:21.396
to regain control of their collateral because the thing wasn't documented and

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closed right in the first place?

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This goes back to using the correct loan documentation for that state and making

00:13:26.996 --> 00:13:29.896
sure everything was closed and documented the right way.

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Now, another important issue to think about is the usefulness and the desirability

00:13:34.276 --> 00:13:35.856
of the subject property.

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Let's pretend for a moment that a note buyer buys this note and eventually that

00:13:41.627 --> 00:13:46.207
borrower stops paying and the new holder of that note has to repossess the property

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and it falls back in their lap.

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How difficult is it going to be for that note investor to resell this property?

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Is this the kind of property that's going to sell fast because everyone wants

00:13:56.867 --> 00:14:00.467
it? Or is it going to take years to get it sold, even at a steep discount?

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All of these things play a role in determining how much a note can be sold for.

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The more assurance you can provide for a note buyer, and the more desirable

00:14:09.447 --> 00:14:12.087
the property is, the more they're going to be willing to pay.

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And conversely, the less assurance you can offer that note buyer,

00:14:15.927 --> 00:14:20.887
or the less desirable this property is, then most likely the less they're going to be willing to pay.

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Because of this, if you close a seller finance deal with the intent of eventually

00:14:25.507 --> 00:14:29.247
selling that note, you should do everything in your power to,

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first of all, only offer seller they're financing undesirable properties that

00:14:33.587 --> 00:14:35.667
are going to be easy to resell.

00:14:35.747 --> 00:14:40.767
And at the very least, do some very basic investigation into your borrower to

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verify that they're credit worthy and are likely to pay on time every time.

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And if you find that the borrower has a poor credit score or some other apparent

00:14:48.707 --> 00:14:54.927
risk factor, try to mitigate this risk by requiring a higher down payment from them at the closing.

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Because a higher down payment can cover a multitude of sins.

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And also, be sure Make sure that you're using the correct loan documentation

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for your state with the right language that gives the lender all the powers

00:15:05.627 --> 00:15:10.627
they need to regain control of the property if the borrower ever defaults on their loan.

00:15:10.767 --> 00:15:15.047
And also, use a loan servicing company or payment collection software that's

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going to make it easy to redirect the borrower's monthly payment from you to

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whoever that new note buyer is so that you can assign the new note to the buyer

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after it's sold, preferably.

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Without causing confusion for the borrower or making them change where or how

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they have to make their monthly payment.

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Paying attention to these details upfront will ensure that you're working with

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a stronger borrower, whether they're paying you or someone else in the future.

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By going through these motions, you're not just helping the future note buyer,

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you're also helping yourself in the meantime.

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So let's talk about how to actually sell your notes.

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Let's say you've got a note, you want to sell the thing, what's the best way

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to make it happen? Well, first of all, if you know an active note buyer who

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is out there actively trying to buy land notes, you could always go directly

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to them and try to make a deal happen that way.

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But what if you don't know any active note buyers?

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Or what if the ones you know aren't interested in buying your particular note for whatever reason?

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Well, I got some good news. There is an online marketplace called PaperStack.

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That's P-A-P-E-R-S-T-A-C.com.

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This is a marketplace place that was built and designed for this exact purpose.

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This is where note buyers and note sellers come together to do business.

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And if you have a note that you're trying to sell, whether it's on land or a

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house or some other type of property, there's a good chance you can probably get the job done here.

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Once you sign up for an account and go through the onboarding process.

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Selling your note is fairly similar to selling a property.

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If you've ever created a property listing, a lot of the same information goes

00:16:44.838 --> 00:16:48.178
in here, including pictures of the property, maybe a short description of the

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property, but the key difference is we're trying to sell this to a note investor, not to an end buyer.

00:16:53.318 --> 00:16:56.678
So a lot of the information we're going to provide is financial information,

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credit information, details about the loan itself that's being sold.

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So you'll want to include all the pertinent details about the property and answer

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all the typical questions that a note buyer would have, and then actively communicate

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with any active buyers who contact you about the notes that you're trying to sell.

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And if you've ever tried to sell a property before, as with most listing websites,

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you'll probably find tire kickers and people who will just waste your time.

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Try not to get discouraged or frustrated.

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It's just part of the process until you find a worthy, legitimate buyer.

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And if you try PaperStack and find that it's just not working for you,

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you could also consider building your own buyers list.

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So you can sell your notes faster to more of a pre-qualified list of note buyers

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who are ready to buy now and you know that they're a good fit with your criteria.

00:17:42.979 --> 00:17:47.579
So again, why is it so important to know when and how to sell notes like this?

00:17:47.679 --> 00:17:51.719
I think it kind of goes back to solving some of the biggest objections that

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real estate investors have with selling their properties with owner financing in the first place.

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When I think of the biggest reasons not to offer seller financing when I'm selling

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properties, they boil down to a handful of reasons.

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A really common reason is that, well, I want all my money now.

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I don't want to wait three to five years to collect all my money,

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or I don't want to learn all the rules and regulations and documentation every

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time I have to sell a property in a new state.

00:18:16.059 --> 00:18:19.779
Or maybe I want to avoid having to chase after borrowers who stop paying.

00:18:20.039 --> 00:18:23.679
Or some real estate investors want to avoid hiring an attorney to bring all

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their properties through foreclosure if the borrower disappears.

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Or maybe you don't want to have all the extra moving pieces in your accounting

00:18:30.139 --> 00:18:32.879
software tracking payments for years on end.

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Or maybe you just want a simple clean cut deal where you don't have to communicate

00:18:36.979 --> 00:18:42.039
and maintain a long-term relationship with the borrower, even if they do pay on time as agreed.

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I believe all of these are valid objections because most of these things simply

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are not required if you don't offer seller financing.

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Soon as you get into seller financing, a lot of new complexities come into the picture.

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But again, this is why the ability to sell your notes is such an important factor

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to consider because if you sell your note immediately after or shortly after closing,

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you can eliminate most of these problems altogether together while still taking

00:19:09.159 --> 00:19:12.899
advantage of what seller financing has to offer for sellers.

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The one problem you can't solve completely is the necessity of learning the

00:19:16.999 --> 00:19:20.299
rules, regulations, and paperwork in each new state.

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But the good news is you can mitigate this and get a lot of help by just using

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a title company or attorney to close all your seller finance deals and use their

00:19:29.239 --> 00:19:30.659
state-specific documentation.

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Assuming you did everything else right once Once that part is done,

00:19:34.519 --> 00:19:37.259
you can sell off that note and get cashed out pretty quickly.

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So, I totally understand why some real estate investors want nothing to do with seller financing.

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After all, this is the stance that I took for many years. But the fact is,

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some properties will be much harder

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and slower to sell if you don't offer seller financing as an option.

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So, if you want the benefits of selling properties faster and for more money

00:19:57.699 --> 00:20:02.679
with seller financing, but you don't want the hassles of managing seller finance

00:20:02.679 --> 00:20:06.519
deals, then that's where selling the note could be your next best option.

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Music.