My 36 years of experience in buying seller-financed notes has taught me the importance of understanding the difference between following a real, proven recipe versus just copying the recipe of someone who may not have known that much about the topic.

Way back in the 1990s, I designed a seller-financed note system for HomeVestors and numerous other A-list real estate investors along the way. I found that I could really make a big difference in a piece of their business in which they didn’t have much experience – but we did.

Knowing how your notes will perform and identifying the secondary market where you can sell them isn’t a mystery. It’s a predictable calculation in your business.


I have recognized that most real estate investors are really copycatting somebody else. They listened to a successful local investor or a guru who came through an investment club or meet-up who shared his or her experience, and they ended up copying that person. Those people then share the same information with other investors, and so on.

That’s all well and good, as long as they’re copying somebody who really has a proven successful recipe or formula. But if they’re not? I am sure that many of you reading this article have experienced a scenario such as this:

An expert on rehabs does a presentation on how he or she acquires a property, renovates it and then sells it. He or she runs through all the techniques and numbers. That person’s experience is spot-on. The rehab expert then explains that in today’s market, he or she is selling the properties quicker and at a premium price by seller-financing the transaction. He or she then shows how to create seller-financed notes.

New and even experienced investors then pick up that person’s technique and copy it. It’s highly unlikely that this rehab expert truly understands creating seller-financed notes in today’s market and under the current lending guidelines. These copycat investors end up setting themselves up for the eventual train wreck. I have seen it hundreds of times.

It’s not very good when you find out later in life that you copied somebody who really didn’t have it figured out, either. Whether it’s a lease-option, landlording or flipping scenario, remember that most people are copying somebody else. This includes the majority of the people that I have met over the years who are seller-financing their properties.

I have purchased more than 1,000 portfolios of seller-financed notes. I’ve probably analyzed 4,000 or 5,000 portfolios. And what I found was that 75% to 80% of the loans I analyzed did not meet investment-grade standards.

Did the person that you’re copying create a portfolio that we were willing to buy at top dollar, or did they create a portfolio that we passed on? That is a very significant factor that most people don’t consider.

Six Factors

Whether you’re creating a single seller-financed note or a portfolio of seller-financed notes, you must do it in a very purposeful way. You want to use a recipe that enables you to create an investment-grade note. Even if you never sell the note, why wouldn’t you create a note that’s based on the experience of seasoned note investors? They focus on the performance of the note—not the pawn shop mentality of “If they don’t perform, I’ll just foreclose and start over.”

A note investor prices a note based on these six characteristics:

  1. The buyer’s/borrower’s financial qualifications (credit, income, balance sheet)
  2. Underlying collateral value (real estate)
  3. The buyer’s/borrower’s equity (skin in the game)
  4. The terms of the note (interest rate, payback period)
  5. Buyer’s/borrower’s payment history
  6. Proper legal paperwork (compliant and recorded)

Like any recipe, the amount of the individual ingredients will influence the “flavor” of the final product. So, it’s not just the ingredients that count, it’s also the relationship between the ingredients. For example, a strong down payment could counter weak credit. Great credit with a healthy down payment could counter weaker collateral.

These line items require a deeper understanding than what we could fit into this article but think of it this way: You want to create a note that note buyers desire rather than a “pawnshop” type of note. The stronger each one of the six factors is, the more valuable your note is.

Note investors do buy imperfect notes, but they have minimum standards for each note, meaning there are enough redeeming factors to make the note buyable. Most real estate investors who haven’t sold a lot of notes wouldn’t know this.

If you created a note without checking the credit and took a small down payment on a property that you think is worth a certain price, well, you are not creating an investment-grade asset, you have created a “pawnshop” note. You might be able to sell it, but you won’t like the price.

Smart Marketing

Smart marketing is done by always having an end goal in mind. With seller financing, you want to market to deserving buyers, not problem buyers. The goal is to sell the house and the buyer pays off the loan. That is a successful transaction for both parties.

Selling a house and finding out later that the buyer can’t pay will land you in a very strange situation indeed. It’s not working for them; it’s not working for you. You really just weren’t very calculated on how you entered into the transaction with them. Always start out with the end in mind and market for the good people.

Instead of running advertising that says, “No money, no credit, no problem” or some version of that, ask for what you want. Check your local advertising, and I am sure that you will see those type of ads. They are using the wrong recipe. Try an ad that says, ”Seller financing for deserving buyers with large down payment,” and you’ll be surprised whom you can sell to.

It’s a misconception that seller financing is only needed because the borrowers don’t have any money to put down or because they have bad credit. There are a lot of other reasons people need seller financing.

Probably the biggest reason in today’s market is that it is difficult—if not impossible, in some areas—to get bank financing on the lower-priced (under $80,000) homes. Dodd-Frank took the banks’ profit margin out of those loans.


In conclusion, here are three takeaways:

  1. Market smart
  2. Find deserving buyers
  3. Use properly structured and compliant notes

Create a note that note-buyers desire. Make sure that the borrower can make the payment, not might make the payments. When this is done, you can receive long-term monthly passive income or sell the note for a lump sum. You could also sell a portion of the note for the lump sum now and cash flow later.

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