Selling My Mortgage Note

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.

Selling My Mortgage Note: What It Is and Why Consider It

A mortgage note is a legal document outlining the terms of a real estate loan. It details the loan amount, interest rate, repayment schedule, and other key information, serving as a binding contract between the borrower and lender.

Reasons to sell your mortgage note include:

Immediate cash: Receive a lump sum upfront for other financial needs or investments.
Risk transfer: Shift the risk of default to the buyer.
Reduced administrative burden: Avoid managing loan payments and collections.
Portfolio diversification: Spread investments across different assets to mitigate risk.
Financial flexibility: Simplify finances and pursue new opportunities with increased liquidity.

Selling a mortgage note can provide financial flexibility and help achieve various financial goals, though it’s important to consider the long-term implications of giving up future payments.

Want to know what your note is really worth?

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.

Full Sale

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.

Partial Sale

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.

Other Options

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 and some buyers of notes don’t offer this service, we won’t spend more time on them in this article.

Setting Up A Safe Mortgage Note

While all mortgage notes carry some chance of default, you can minimize that risk by keeping the following points in mind:

1. Payer Credit

If possible, sell the property to someone with strong credit. This means a FICO credit score of at least 700. You can still sell a note when the payer has weaker credit, but you won’t receive as much for the note due to the added risk. Most note buyers won’t consider notes where the payer credit is far below 600.

3. Down Payment

A high down payment from the buyer shows a bigger commitment to the property and a lower likelihood of default. A 10% down payment may be okay for a residential property if the note has other strong points like a long payment history, but 20-25% is much better, especially for commercial, mobile home, and land notes.

5. Interest Rate

You should be able to use a note interest rate that is above the rate charged by banks for similar properties. All else being equal, a higher note rate will mean a smaller discount when you sell the note. This is because note buyers use yield and a rate of return as part of their calculation when pricing a note.

7. Title Insurance

When you sell the property, ask the title company for a lender’s title policy. This both protects your interest in the property and speeds up the process if you decide to sell your note.

2. Personal Guarantee

It is fine to sell your property to an LLC, corporation, or trust, but ask the payer to also sign personally. This makes the note less risky, and should get you a better price for your note.

4. Sales Price

In general, the sales price should be in the same ballpark as the property value. Note buyers will nearly always conduct a drive-by appraisal of the property to ascertain the value.

6. Term

Try to get as short of a term as possible (but at least 3 years) while still ensuring that the buyer can afford the payments. For example, a note term of 15 years will make your note more valuable than a 30-year amortization, as the holder of the note gets their money back sooner. Balloon payments may be used when needed but be sure that they conform with the federal Dodd-Frank Act on residential properties.

8. Storing Documents

Keep all original documents, especially the promissory note, in a safe place. The note buyer will want this original note if you sell your note. When payments are received, keep copies of the checks or bank statements.

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:

1. Property Type

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

2. Payer Credit

The payer’s 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.

3. 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.

Want to know what your note is really worth?

4. 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.

5. Documents

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:

Experience
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.
Accreditation
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.
Licensed
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.
Gut Feel
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. Providing comprehensive documentation, including details of the mortgage loan, is crucial for a smooth and successful note sale. 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. The demand for buying real estate notes can fluctuate based on economic conditions, influencing the timing and pricing of note sales.

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.

Written by Alan Noblitt

Alan Noblitt is the President of Seascape Capital, LLC, and works as both a real estate note buyer and a business note broker. Alan has an MBA from Arizona State University, a B.S. from the University of Wyoming, and is licensed as a California Real Estate Note Buyer.