Collateral for Seller Notes?

October 22, 2025

by a searcher from Columbia University - Columbia Business School in Orinda, CA, USA

What is market to pledge as collateral on seller loans? I am discussing a 50% LTV seller note which will full amortize over 3 years. Given the low LTV and short repayment, I have proposed it be collateralized by the business. Seller wants me to pledge my real estate/primary residence. Thanks!

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Reply by an investor
from University of Oxford in Austin, TX, USA

Zero collateral beyond the business's cash flows is standard. One of the goals with the seller note is to incentivize the seller to be honest throughout the transaction - adding collateral beyond the business's cash flows would diminish that. Perhaps there are good cases for exceptions at very high LTV

Reply by an intermediary
from University of Iowa in Kansas City, MO, USA

Lots of "no" answers here, which I generally agree with. What you're dealing with likely stems from an inexperienced and nervous seller. If they are getting this information from an advisor...even worse, but this gives you an opportunity to educate (and create a deeper connection) with the seller. What this seller doesn't realize is that should you default, he/she just doesn't get the keys and title to your house. This is especially true if there is a first DOT in place. Liquidating a loan secured by real property is VERY expensive and time consuming. Sellers rarely realize that there is not many "teeth" to the notes, but if they wish to have some sort of security interest, I would suggest a junior position on the UCC. This does two things - 1) ensures they get paid if you sell before the note matures and 2) puts them firmly in line of the list of creditors should you need to file for bankruptcy protection. A few comments on the personal guarantee - I have found that most don't fully understand the concept and tend to think that signing one or having it on a seller note is a deal breaker. PGs do not give the creditor unfettered access to your assets, and they still need a judgement in ALMOST every state. If you have senior debt, it will be behind that regardless of what the document states. Shoot me a DM if you'd like to chat more about this. 50% seller carry is a lot, so I would definitely understand their argument.

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