Updated September 2020
Note holders sometimes don’t understand clearly the differences between a mortgage note buyer versus a note broker. More importantly, they are not sure about the advantages of working with each. In this article, each type is described, as well as detailing what to look for in both.
Mortgage Note Buyer vs. Note Broker
When you sell your mortgage note (also called a real estate note or promissory note) to a direct nationwide note buyer, that means the individual that you are working with is the direct purchaser of that note- he or she is the note investor and is responsible for providing the cash for the note sale. Without the involvement of third parties, there are no broker fees or commissions incurred in the sale of your note, and since you are dealing directly with the mortgage buyer, it can sometimes make for a smoother transaction. The discount that is figured into the sale plus the established interest rate on the note will account for how the note buyer makes money.
The main responsibility of the mortgage note broker, however, is not to use their own cash for notes, but to “list” your mortgage note for sale and find the most suitable investor. Mortgage note brokers typically have a competitive network of investors with whom they work closely to find the best match for your note sale. Note brokers make their money from commissions paid to them by the investor when the note purchase concludes.
In some cases, as is the situation with Seascape Capital, the mortgage note buyer may act as either a direct note buyer or as a note broker, depending on which is most appropriate for the situation based on the location of the property and the characteristics of the note. As a seller, this gives you the added advantage of making sure your goals for the sale of your note are met.
Either way, it is especially important to work with a reputable mortgage note buyer and/or broker in whom you have confidence and can trust. The bottom line is that you should be able to receive a competitive offer regardless of whether you work with a note buyer or a note broker, as long as you follow the guidelines below.
What to look for- and look out for- in a note buyer
So how do you know if you can trust a prospective note buyer or broker? Here are some important considerations and things to look for:
- Your note buyer or broker may need to be licensed in the state of the property. This license regulates note buyers and ensures that they adhere to industry standards for the seller’s protection.
- Look for an established history of note buying- the buyer’s demonstrated experience and expertise will mean less potential for things to go wrong and a more knowledgeable buyer typically has more resources.
- Before you commit to anything, be sure to check your buyer’s reputation by asking around and talking to references. Chances are, if enough people have been unhappy with a past transaction with this buyer, there will be signs of it. At the very least, conduct a Google search on the company and individual, check the status of their license, and consult the Better Business Bureau to review their rating.
- It is always a good idea to compare quotes. This is especially important for uncovering any hidden fees (such as closing costs) that you may not know to anticipate. If, after talking with a note buyer and getting your questions answered, you do not feel confident in their integrity or trustworthiness, keep looking for someone more to your liking.
There are a few warning signs of which to also be aware when talking to prospective note
buyers, such as:
- Your intuition (or, “gut check”). Common sense tells us that if it sounds too good to be true, it probably is.
- A price quote that you receive should be valid for at least ten days. If you are quoted a price that is only good for one day, or you are being pressured to commit to a sale, politely tell the person that you will be looking somewhere else.
- If you are asked to pay costs upfront, this is usually a red flag. The discount you take when selling your mortgage note should cover most of the buyer’s expenses. Be cautious of hidden fees.
- There are four main reasons the value of a note could go down: 1) credit issues, 2) property is valued lower than the sales price and/or is in poor condition, 3) problems with the documents, and 4) defects on the title that cannot be corrected. Be familiar with these so you can be proactive. If you feel that you are being subjected to a bait-and-switch ploy, promptly end your transaction and report the buyer to state authorities.
- Generally speaking, any pressure or coercion to accept a lower sales price is reason enough not to sell to that buyer.
We certainly hope this has been helpful in differentiating direct mortgage note buyers from
mortgage note brokers, and alerting you to important information about the process of selling a
real estate note. As always, we are happy to answer your specific questions, so feel free to give us a call.
As we continue our series of “Selling a Real Estate Note 101”, next week’s topic will cover more
important information you will want to know when selling your note. We hope you will join us
and feel free to leave comments or questions below- chances are, if you’re concerned about it,
someone else is too.