As we explore the topic of how to sell a real estate note, one of the biggest questions every note seller has is What is my note worth? To answer this important question, we will take a look at some of the factors that go into determining the worth of a real estate note, what you should know as a seller to get the maximum sale price for your note, and the typical time frame it takes to get your cash payout.
What Is My Real Estate Note Worth?
The value of your real estate note (also called a mortgage note or promissory note) is dependent upon several variables. While the particulars of each individual cash note and note sale are different, here are the most important factors that determine a note’s worth:
- The amount of equity in the property. As a percent of the property value, this includes the downpayment and length of time that the mortgagor has been making payments (or mortgage seasoning). Generally speaking, the more money that has been paid in, the better the quote you will receive.
- The structure of the promissory note. The length of time and payment schedule of a mortgage note is a consideration since payments received at a future date are less valuable than payments received sooner. Another important factor is the interest rate specified on the mortgage note.
- Type of property. Risks are inherent to every property and note type. Single-family houses typically have the lowest associated risk and can usually be quoted higher than real estate notes on commercial buildings, mobile homes, or vacant land. However, anything resembling the shack below would only be worth the value of the land.
- Condition and location of the property. The condition of the property and surrounding areas, and the location of the property are important factors in determining both the market value of the property and the value of the mortgage note. It is beneficial when a property is owner-occupied and when the land has access to water, power, and roads. For commercial notes, it may be harder to sell the note if the property has a higher potential of liability to the note holder due to its environmental history and its related potential consequences (for example, if a property previously had a gas station). Commercial notes are also more desirable when they are multi-unit apartments or general-use office buildings, as opposed to specialty businesses.
- Lien notes. In almost all cases, 1st lien notes are considered more valuable than 2nd lien notes because there is a much higher risk to the holder of a 2nd lien note.
- Credit rating and payment history of the buyer. In the case of a partial or full note sale, it is important that the note seller consider the credit rating of the property buyer. A FICO (credit score) of 680 or better is ideal. A lower credit score with a solid payment history may still work, but a credit score below 600 typically requires the note seller to sell their note at a larger discount.
Again, these are just some of the important variables taken into consideration when determining the worth of a mortgage note. We understand that selling a promissory note at a discount is a common concern for sellers. If you would like additional suggestions on how to structure your mortgage note for maximum value, please read our Tips on Creating a Real Estate Note. As a general rule, however, the higher the interest rate and shorter the term of the mortgage note, the less of a discount a seller would need to take when selling their note. If you would like to talk to us directly to discuss your specific options for minimizing a discount on your mortgage note, please give us a call today- we are happy to help answer your questions.
How Long Does It Take to Get the Cash Payout From Selling My Note?
Once you have decided to sell your mortgage and have accepted a quote from a mortgage note buyer, you will likely need to provide copies of the Deed of Trust or Mortgage, the Note, the Title Policy, and the Closing/Settlement Statement. If there is no recent appraisal or title policy, the mortgage note buyer should offer to arrange and pay for those services.
Although it may vary slightly by mortgage note buyer, the full process from start until funding generally takes 3-5 weeks. Your note buyer should give you the option to receive the cash by check or electronically.
If you are considering selling your real estate note, please call Alan at Seascape Capital. He will review your information and provide you with candid feedback about what you can expect for your mortgage note.
