Skin in the game?

QUESTION: I’m selling off some investment property, and I’m considering taking back a 1st position note from a potential buyer who also wants me to take back a second position note for the down payment at a higher interest rate. It’s tempting because of the potentially higher net return, if I did so, would this diminish the value of my note if I want to sell it down the line, and, if so, how badly?
 
ANSWER: This would absolutely diminish the cash value because an investor wants to see ‘skin in the game”. No cash down raises a red flag. The buyer has essentially nothing at stake except for his potentially having to give the property back through foreclosure if he defaults. There may be a buyer who  would go for that, but the discount you’d have to take would be considerably higher than it otherwise would if cash was put down at closing. Anything less than, say, 10% cash down (at a bare minimum) is just plain undoable for just about any investor you present this to. My general advice in cases like these would be to run the potential “deal” by some volume note investors and see what they say and/or if they quote and at what terms. Defer to their experience. If it isn’t good enough for them, it almost certainly shouldn’t be good enough for you unless you are a very seasoned note investor and are buying for your own account to keep for monthly income and have performed your own thorough due diligence. Move on to the next deal. The climate’s too fertile right now to be wasting your time on these.

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