Brokering a Note With Unusual Collateral: A Worked Example

A note backed by unusual collateral can usually be sold, but fewer buyers will look at it and those who do will want more yield. The broker’s job is to shrink the buyer’s uncertainty: establish what the property is really worth, find the buyers who already understand that kind of property, and offer a structure, often a partial, that limits how much risk any one buyer has to take.

Below is an illustrative example of how a broker might work one of these deals from start to finish. The numbers are round and made up to show the method.

What makes collateral “unusual”

Most note buyers are set up for one thing: a first-lien note on a single-family house the payer lives in. Anything that makes the property harder to value or harder to resell pushes a note out of that box. Common examples:

• Rural acreage with a cabin, barn or off-grid home
• Mobile homes, especially ones not attached to owned land
• Mixed-use buildings, such as a shop with an apartment above
• Special-purpose buildings like a small church, a former school or a rural storefront
• Business notes secured by equipment, inventory or a business’s assets rather than real estate

The common thread is resale. If a buyer ever has to take the property back, how long will it take to sell, and for how much? When nobody can answer that with confidence, the price drops.

The example: a note on rural land with a cabin

Say a seller sold 20 acres of rural land with a small off-grid cabin and carried the financing. The note terms:

• Balance: $60,000
• Rate: 9%
• Payment: about $760 a month
• Payments left: 120 (10 years)
• Payment history: 18 months, on time
• Seller’s view of the property value: $110,000

On paper, the payment history is decent and the seller believes there is plenty of equity. But the first two buyers the broker calls pass. One does not buy land notes at all. The other says there are no comparable sales and they cannot value an off-grid cabin.

Step 1: replace guesses with evidence

The seller’s $110,000 figure is a guess, and buyers discount guesses heavily. The broker’s first move is to build a value buyers can rely on:

• Pull recent sales of rural acreage in the same county, with and without structures
• Get photos of the cabin, the access road, the well and any power or septic setup
• Confirm legal access to the property and check for any easement issues
• Arrange a broker price opinion from a local agent who sells land

Say the broker price opinion comes back at $85,000. That is lower than the seller hoped, but it is a number a buyer can use. Better a real $85,000 than an unsupported $110,000. For more on why property type moves price, read property type, condition and note value.

Step 2: find the buyers who fit

Some buyers specialize in land and rural notes because they understand the resale market there. Others focus on mobile homes, or on commercial and mixed-use paper. For unusual collateral, the right buyer is the one who already holds similar notes. Our guide to vacant land notes explains why land is priced differently.

With the valuation in hand, the broker sends the file to four buyers who do rural or land notes. Two come back with bids.

Step 3: compare a full sale with a partial

Here is what the bids look like:

A partial is a sale of a set number of payments. After those payments are made to the buyer, the rest go back to the seller. Buyer B accepts a lower yield on the partial because it is only exposed for five years and the amount it pays is well below the property value. Its investment-to-value, the price divided by the property value, is about 40% on the partial versus about 60% on the full purchase.

The full sale gives the seller more cash today. The partial gives less cash now but keeps five years of payments for later. Neither is right for everyone. A seller who needs $30,000 for a specific reason may prefer the partial. A seller who wants to be done may prefer the full sale. The broker lays out both and lets the seller choose. See how a partial note purchase works for the mechanics.

Other tools for hard-to-place collateral

• Additional collateral. If the payer owns another property, adding it as security can make a weak note bankable. This needs the payer’s agreement and new recorded documents.
• Wait for more seasoning. Another year of on-time payments can move a note into more buyers’ range.
• Clean up the paperwork. Unusual properties often come with unusual documents. Fixing recording, legal description or access issues before shopping helps.
• Co-broker. If your buyer network does not cover the collateral type, another broker’s may.

What to tell the seller early

Holders of unusual notes often expect the same treatment as a house note. Tell them on the first call that fewer buyers will look, that the yield will be higher, and that the property value buyers use may be lower than theirs. Then explain what you will do about it. That honesty keeps the relationship intact when the bids come in lower than they hoped.

Bottom line

Unusual collateral narrows the buyer pool and raises the yield, but it rarely makes a note unsellable. Document the property’s value with real evidence, go straight to buyers who know that kind of collateral, and put a partial next to the full-sale offer. The seller then chooses between real numbers instead of a single take-it-or-leave-it bid.