Updated October 2020
Real Estate Note
You may have heard that you can sell your real estate note (more often called a mortgage note) for cash. You can use that cash however you want — to pay down debt, make investments, etc. If this is something that you are considering, it is important that you understand how the process works and how to get a good deal from private mortgage buyers.
In the previous article, we discussed how to structure a real estate note to help you obtain the maximum value from it. Let’s say that the note has now been set up, you have received at least one payment from the property buyer, and now you’ve called a real estate note buyer like Seascape Capital to sell the mortgage note.
The first thing that most note sellers think about is selling the entire mortgage note. If that scenario fits your financial situation and the note is likely to fetch a high value, you may want to go down that path.
But wait, you should at least understand other options in order to choose the one that is the best fit. Sometimes, note sellers like the interest rate that they are receiving on the note, but just want to obtain some amount of cash now. Or, what can you do if your note doesn’t meet some of the criteria needed to obtain a high price (i.e. good equity and strong buyer credit)? It is possible, and often to your advantage, to just sell some of the payments. This is called a partial, and it can often provide you with a much higher rate of return.
Example of a Partial
An example should help here. Assume that you sold a house for $120,000, the buyer gave you $20,000 as a down payment, and you have a $100,000 note at 7% for the next 15 years (180 months). You enjoy getting the income each month but need $30,000 for another investment or to pay off debt. We could give you that $30,000 in exchange for buying the next “x” number of payments (for instance, perhaps the next 60 payments), after which the note reverts back to you for the remainder of the term.
There are also other ways to structure the note to meet your needs, such as getting a lump sum of money now plus receiving a part of the payment each month thereafter. This is called a split-payment partial. A knowledgeable note buyer will be able to explain various options to you in more detail.
The items that are described above and in the previous article apply mainly to 1st liens. If you have a 2nd lien, where there is a bank or another investor with a more senior lien against the property, you may be able to sell the note, but the price that you receive won’t be nearly as high. You generally won’t be able to sell those types of notes at any sort of decent price unless the buyer has put in at least 30% of his own money as a down payment or in built-up equity.
Now you have received quotes for both a full buyout of the note and for a partial purchase, and have selected the one that best fits your needs. Since the note purchasing business is lightly regulated in most states, you do need to be careful to work with a reputable investor or broker. Here are some things of which to be aware:
- Make sure that there are no upfront fees. An ethical note buyer isn’t going to charge you just to provide quotes or to check the buyer’s credit.
- There should be no points, closing costs, or other garbage fees at any point in the process. Any fees are already included in the pay price to you.
- Some note buyers may require that you pay for the appraisal or the title policy ONLY if the property appraises for less than the sales price or there are problems with the title that prevent the purchase. However, these payments should cover just the buyer’s actual costs.
- Ensure that the seller gives you a written purchase agreement covering the purchase price, contingencies, etc., and be certain to ask questions about anything that is not clear.
- Be certain that the note investor checks the credit of your property buyer upfront. There have been cases of unscrupulous buyers quoting one price and then lowering it toward the end of the process, often using the excuse that the “property buyer’s credit was low”. This “bait and switch” method is definitely not ethical or legal.
So, what are the steps involved in selling your note? The process is simple and straightforward:
- Contact us and provide basic information about the note and property (type of property, sale price, payment amounts, etc.)
- We respond within about one business day with your offers
- If you approve the quote, we ask you to send copies of the Deed of Trust or Mortgage, the Note, Closing/Settlement statement, Proof of payments, etc. in order to check the buyer’s credit and conduct our due diligence. If there is no recent appraisal or title policy, we arrange for those, at our expense.
- From the time that you approve the quote and provide the documents, it generally takes 4-5 weeks for you to get your money. You can choose to receive the cash via check or electronically.
Selling your note can be a great way to generate a lump sum of cash. If you have additional questions, feel free to contact us anytime.