If you sold a property using owner financing and are receiving payments on your mortgage note, you may have heard that you can sell that note and get the cash out of it. You may be wondering about the advantages and disadvantages of selling your note. Perhaps you are deciding where to start, how to find a trustworthy mortgage note buyer, and how much your note is worth. Below I answer all of these questions and more in detail.
Options for Selling a Mortgage Note
When selling a real estate note, some people assume that it is a “one size fits all” akin to getting a loan from a bank. In reality, there are multiple ways to sell a note and to put a value on a note.
When you sell a note to a mortgage note buyer, there is always some amount of discount. This means that you will receive something less than the current balance of the note. The amount of the discount and what affects the discount are fully discussed below.
When you sell a full note, this means that you are selling all future payments on the note to the note buyer, and that company will be taking on the associated risks of the note.
Let’s say that Jane has been receiving payments on a note for 6 months. The original note was for $100,000, with a 5% interest rate, a 15-year amortization term, and a monthly payment of $790.79. A note buyer offers Jane $88,000 for the full note. Once all of the note investor’s due diligence is completed and the assignment documents are signed, Jane would receive the $88,000 and be done with the note.
Jane may like the note and wants to keep part of it. She decides that she really only needs $30,000 right now to pay off credit card debt, help her son with college expenses, or start a new business. She contacts her favorite note buyer (Seascape Capital, of course) to find out how many payments she would need to sell to get $30,000 now. She is told that she can sell 44 payments (almost 4 years) of payments to receive that net sum.
Jane agrees to that amount, and part of the note is purchased. During that 44-month period, Jane can either do nothing or decide to sell another piece of the note. She does not need to wait 44 months to sell more of the note. Generally, as long as the payments are coming in on time and the property is in good shape, the note investor would be willing to purchase more of the note as soon as 6-12 months after the initial purchase. Again, this is totally Jane’s choice, as she does not have to sell more of the note. If she doesn’t, the note reverts back after the 44 payments are made, and all future payments go directly to her.
There are other methods for selling part of a mortgage note. For instance, with a split-payment partial, the note holder receives money upfront and part of each monthly payment. This could help someone who is elderly or on a fixed income. Since this and other ways of selling a note are rarely used, we won’t spend more time on them in this article.
What Affects The Value of My Mortgage Note?
When a note investor is evaluating a mortgage note, they look at a number of factors. The combination of these factors determines how risky the note is perceived to be how to put a price on it. Notes with less risk will receive better prices when selling a note.
The following items are all considered by a mortgage note buyer, with the first three being especially important:
While a note associated with any property type can be sold, not all properties are equal. When selling a note to a note buyer, the safest type of property is a house or condo, with the payer on the note living there (owner-occupied). Because a house is where people live and keep their belongings, they are unlikely to default on the payments. Defaults are messy, and note sellers and buyers prefer to avoid them. The riskiest type of property is vacant land, especially if it lacks access to some utilities and roads, In between owner-occupied houses and land on the risk scale are:
- Non owner-occupied houses
- Multi-family housing units (e.g. a 4-unit apartment building)
- Regular commercial property like an office building
- Mobile homes with land
- Riskier commercial properties like restaurants and gas stations
The credit score and history of the payer on the note is a good indicator of whether he or she will continue to make payments on the note. For example, the seller of the note will get a much higher price on the note if the payer has a credit score of 700 compared to a payer with a credit score of 600 or less. Some notes, especially with commercial properties, are bought in the name of an LLC or corporation. If there is no personal guarantee, this shows less commitment by the payer. These note types are likely to receive lower offers.
Down Payment And Seasoning
Generally, a bigger down payment and some seasoning makes a note valuable. If a new note is created on a property sold for $200,000 with no down payment, the payer has minimal “skin in the game”, so the note would be considered risky. On the other hand, if the property sold for $200,000, there was a $40,000 down payment, and the payments have been coming in on time for 6 months, the note would be much more valuable.
Terms Of The Real Estate Note
Another important item to consider when creating a mortgage note are the terms of the note. This mostly refers to the interest rate charged and the term of the note in years. The higher the rate (up to a point) and the shorter the term, the higher of a price a note holder will receive. Ideally, the note rate is a few points above the prime rate and has a term of 10 years or less. A longer amortization period with a balloon in 3-5 years is also good.
Normally, an attorney or title company should prepare all of the documents when a property is sold using owner financing. This reduces the chances of errors or omissions. Unless both the buyer and seller of the property are experienced real estate experts, “home-grown” document will often need to be revised.
The note holder should place the original documents from the sale in a secure place. As payments come in each month, the note holder should record the dates and the amounts received.
Selling To The Right Note Buyer
In the U.S., there are hundreds, if not thousands, of mortgage note investors and note brokers. Choosing the right one not only determines the amount you will receive but also how smoothly the process goes. Here are things to look for in selecting the best note buyer:
Many note brokers in the industry learned about note buying from a book or seminar but have no real world experience. It is best to sell your note to a top note buyer that has been in the business full-time for at least five years.
The best companies to contact when selling a note have an A+ rating from the Better Business Bureau, and have very positive reviews with the BBB, Google, and similar websites.
Although only a handful of states require note investors and note brokers to be licensed, having a real estate broker license reflects a higher level of commitment and competence.
No Negative Reviews
Look through the online comments from past customers who have sold notes. If several of the reviews are less than positive, choose a different company.
When you talk with a note buyer on the phone about selling your note, do you feel confident that he or she is knowledgeable, trustworthy, and customer service oriented? If not, consider looking elsewhere.
Steps In Selling A Mortgage Note
At this point, you understand the different ways to sell a note, understand what factors impact the price of a mortgage note, and have 1-3 qualified note buyers that you have found. You provided the information about the note and received a good offer for the note, which you have accepted. Now what?
The note buying company will send you an email with an agreement for you to sign and a list of items for you to submit to get started with selling the note. This list includes copies of documents like the note, deed of trust, closing statement, and proof of payments. Once you have provided the requested items, the note buyer begins the due diligence process. The steps are:
- Review all of the submitted documents. This takes only a day or less.
- Order a drive-by appraisal from a local appraiser or agent. This takes 1-2 weeks in most cases.
- The note investor will have a brief 5-10 minute conversation with the note payer to confirm the note balance and that everything is okay with the property.
- The underwriter will order a title commitment from a local title company. This also takes 1-2 weeks.
- Once Steps 1-4 are complete, the underwriter sends out assignment documents to the title company. The note holder signs the documents (usually at the title company) and provides the original note.
- The title company emails copies of the documents to the underwriter for review. The underwriter approves them, and authorizes the title company to release the funds to the note holder. That’s it, as the note buyer alerts the payer about the change of ownership and records the assignment with the county. The whole process from start to finish usually takes about 4-5 weeks.
Is Now A Good Time To Sell A Note?
The right time to sell a note is when you no longer want the burden of carrying the note or if you have a good use for the money. In addition to the factors mentioned earlier that affect a note’s value, economic conditions, market interest rates, and the condition of the real estate market also feed into the calculation of the offer.
Why Choose Seascape Capital?
Seascape has been buying and brokering real estate notes since 2002. We are consistently recognized throughout the industry for our integrity, high degree of competence, and customer service that is second to none. We buy notes in all 50 states and on almost any property type. We encourage you to read the testimonials on our website and at the BBB.