How to Price Land for Seller Financing

Transcript of Module 2, lightly edited for readability. The video was recorded before we passed 250 notes; the figures on this page are current.

Welcome to module two. In the last module, we talked about why seller financing works and how you can receive 84 to 90% of your sales price in cash at closing. Now we need to talk about a critical mistake I see land investors make all the time, pricing their properties incorrectly when offering seller financing. This mistake can cost you tens of thousands of dollars per deal.

or prevent you from selling your note at all. Let's make sure you don't fall into this trap. Before we even talk about pricing, we need to address something fundamental. You need to start with a good property. Seller financing is not a magic wand that makes bad properties sell. If your property has problems, no legal access, clouded title, terrible location, steep slopes or other major issues, seller financing won't fix those problems. You'll just struggle to find buyers willing to finance a bad property. Quality matters. When you have a good property with clear access, clean title, marketable features, and a decent location, seller financing makes itself faster and at better prices. But here's another critical point about quality and pricing.

If there's a default, the costs add up fast. You'll have foreclosure attorney fees, potentially realtor commissions to resell the property, and property cleanup costs that the buyer left in bad shape. These costs can easily run 10 to $20,000 or more. If you overpaid for the property or overpriced it to a buyer and then have to foreclose, Those costs will eat up all your equity. You need to make sure that even after accounting for foreclosure costs, you can resell the property at market value and still get your money back. This is why buying right and pricing fairly matters so much. You need that equity cushion to protect yourself if things go wrong. Ask yourself if Is this a property I would be comfortable owning long-term if the buyer defaulted and I had to take it back? If the answer is no, you either need to fix the problems or reconsider your acquisition. Quality properties are the foundation of successful seller financing. Here's where many investors go wrong. They think, instead of charging interest, I'll just charge a higher price instead.

This is called baking in the interest by inflating your sale price above market value. Do not do this. Here's why. When note buyers like me evaluate whether to purchase your note, we look at something called the investment to value ratio or ITV. This is the ratio of the loan amount to the actual market value of the property.

Note buyers typically max out at 65 to 70% ITV. This means that we won't pay more than 65 to 70% of what the property is actually worth, regardless of what you sold it for. Let me show you what happens when you try to bake an interest by overpricing. Let's say you have a property that's worth $100,000 at fair market value. You think, I'm going to offer seller financing and I don't want to lose all that interest. So I'm going to price it at $150,000. You find a buyer who agrees to pay $150,000 with $30,000 down. Now you have a $120,000 note that you want to sell. But here's the problem. I'm going to look at the actual market value of the property.

which is $100,000. At 65% ITV, I'm only willing to pay $65,000 for that note, not the $96,000 to $102,000 you were expecting based on the loan balance. So you end up with a $30,000 down payment plus $65,000 from the note sale, which only equals $95,000 total.

you actually made less than if you just priced it correctly at $100,000 in the first place.

When you price your property at fair market value and offer seller financing, here's what happens. First, buyers can actually do their research. They look at comparable properties, they see what similar land is selling for, and when your price is in line with the market, they feel confident moving forward. Overpriced properties get researched and then passed over. Second, you can actually sell your note.

When your sale price matches market value, note buyers can offer you fair terms based on 80 to 85% of the loan balance. The math works for everyone. Third, you build a reputation as someone who does quality deals. If I buy notes from you and the properties are fairly priced with good buyers, I'm going to want to buy more notes from you. You become a preferred source.

Fourth, you sell faster. Even with seller financing, overpriced properties sit on the market longer. The sweet spot is pricing your property at fair market value and then offering seller financing is an advantage for the buyer. You're not charging them more for the privilege of financing. You're just giving them an option they can't get at the bank. Let me dive a bit deeper into this investment to value ratio.

because it's critical to understand. When I evaluate whether to buy a note, I'm looking at risk. If the borrower defaults and I have to foreclose, I need to be confident I can get my money back. That means the loan amount can't be too high relative to what the property is actually worth. Industry standard for land notes is 65 to 70% ITV maximum.

Some note buyers are more conservative and max out at 60%. Some are more aggressive and might go to 75% on exceptional deals with great buyers. But here's the key. We're calculating ITV based on actual market value, not your sale price. I'm going to pull comparable sales. I'm going to look at what similar properties sold for recently. And I'm going to determine market value independently.

This is why fair pricing is essential. You need the math to work for note buyers if you want to sell your notes.

Here's the simple formula. Determine fair market value for your property based on recent comparable sales, then list it at that price while highlighting that you offer seller financing. The seller financing is the competitive advantage that attracts buyers and allows you to sell faster. It's not a reason to jack up the price. When you do this, you'll find that you sell properties quickly, Buyers are happy because they got a fair deal with financing. They couldn't get elsewhere. And note buyers like me are eager to purchase your notes because the numbers work. If you want to maximize the value of your loan, there are other ways to do it. I'll cover those in this training. Remember, start with good properties and price them at fair market value. Use seller financing as a competitive advantage to sell faster.

not as an excuse to overprice. Always remember that if there's a default, you need enough equity to cover foreclosure costs and still resell at market value. In the next module, we'll talk about how to find and screen buyers to make sure you're selling to qualified people who won't default. Let's keep going.