Seller Financing - Payment History and Note Seasoning

Author: Robert E Young

Author: Robert E Young

It is widely understood that that the housing market is in a recession and the need for cash is great. Individuals, Small Businesses and corporations can't get loans. There is pressure on prices in the housing market and traditional financing methods aren't helping the situation. So what do you do? You look for alternative options to get the benefits that you want and you find seller financing as the best option. So how does this fit in with note seasoning?

Real estate investors will purchase a seller financed note with as few as 2 payments, three months after the property is sold, as long as all the other note elements check out. I am referring to the note seasoning and payment history of the note. Note seasoning is the period of time a note holder, the individual who offered seller financing, has been receiving payments from a buyer. A green note is a note with only 2 or 3 payments. A note is considered seasoned after twelve months of payments. When a note holder decides that he wants to sell his or her note, note seasoning is one of the many deciding factors that go into the sale of a seller financed note.

I am often asked "if note seasoning is one of the deciding elements that go into the purchase of a seller financed note, why would you purchase a note that has only 2 payments?" It is often assumed that the longer the seasoning the more valuable the note. That is not always the case. Note seasoning and payment history go hand in hand. Payment history is the timeliness of payments. For instance, a new home buyer purchases a house using seller financing. He puts 20% down and has a credit score of 650. The term of the note is 10 years with an 8.5% interest rate. Two on time payments have been made; a pretty good looking note from an investor's point of view. Conversely, a note holder has a note with 24 payments of seasoning, the first twelve were on time but the last twelve payments only 3 payments were made on time and two payments were missed all together. The note is well seasoned but the note has a history of late or missed payments decreasing the value. The discount the note holder will take to sell his note will be substantial.

Another scenario where note seasoning enhances the value of the note, the home buyer puts an 8% down payment (a little low) on a $100,000 sale price and has made 36(three years) perfect on-time payments on a 10 year note. The on time payment history will illustrates a credible track record and the 36 months of seasoning lower the LTV making it attractive to investors.

There is no standard when you determine the discount of a note. The discount was ultimately determined when the note was created, that is why it is important to consult with a note professional before you create it. The discount depends on a multiple of elements: note seasoning, payment History, payor credit worthiness, note position, type of property, location of the property, property appraisal, local market trends etc. etc. etc.

About the Author:

Robert E Young is a real estate investor who specializes in Seller Financing Techniques and strategies. Robert is an expert and can help you with identifying the options you have with your real estate note. Whether you need assistance in creating a note or you want to identify the options you have with an existing note The Texas Note Company can help.

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