How Real Estate Notes Are Created

If someone is currently making payments on their home or other real estate, they either make payments to a commercial lender (bank) or a private party. About 15% of real estate sales in Washington State involve seller contracts, i.e. the seller of the property carries the financing instead of a commercial lender.

Example: Matthew sells his lot to Luke for $100,000. Luke pays $20,000 down payment and Matthew agrees to carry a Contract for $80,000. The monthly payments are $800/month at 9% interest. Ten months later Matthew decides he would rather have a lump sum of cash instead of monthly payments. The balance at that time is $78,120. If he agrees to sell this contract for $69,824, the investor will achieve an 11% yield. This is because the amount invested is less than the balance. If the full balance of $78,120 had been invested, the yield would be the face interest rate of 9%.