How To Sell A Promissory Note

History of Promissory Notes

The first banknote-type was created in China during the 7th century. What we would today call a promissory note took the form of receipts of deposit by merchants who wanted to avoid the bulk of heavy copper coinage in large commercial transactions (per Wikipedia). True paper money did not arrive until the 11th century in China.

What Is A Promissory Note

According to Investopedia, “a promissory note is a financial instrument that contains a written promise by one party (the note’s issuer or maker) to pay another party (the note’s payee) a definite sum of money.” It is a debt instrument that allows a company or individual to get financing from a source other than a bank.

A note can range from a simple IOU that you may have used as a child to a multi-page agreement for a commercial transaction in the millions of dollars. In real estate, a promissory note is most often used by individuals or small companies for transactions starting at a few thousand dollars.

What Is A Promissory Note In Real Estate

In real estate, a promissory note is a legal document that is almost always accompanied by a mortgage or deed of trust. A land contract (also known as a contract for deed), which is used in some states, can incorporate the note and the collateral agreement in a single document. A promissory note will show the amount owed, the interest rate and term, the payment amount and due date, and what happens in case of default.

Because the note is an important legal document, it is necessary for the seller of the property to keep the original note in a safe place. If you decide to sell the note at some point, the note buyer will want that original note.

Why Carry A Promissory Note

“Carrying a note” simply refers to the seller of the property using owner financing in a transaction with a payer. Sometimes, the seller and buyer owner finance the transaction to avoid using a bank or other financial institution. Other times, a promissory note is created because the payer has weak credit, because the property is non-conforming with bank regulations, or because the parties wanted to close quickly. Regardless, unless both parties are real estate experts, either an attorney or title company should create the note and related documents.

If you sold a property with owner financing, you may have done so for the above reasons or because liked getting the steady income, or because of tax reasons. Of course, there are responsibilities that you will want to follow to make sure that your note keeps its value. First, you will want to check at least once per year with the county to ensure that property taxes are being paid promptly and in full. Second, be certain that fire insurance is maintained and current. After all, the property is the collateral for your note. Make sure that any homeowners’ association dues are paid and, for commercial properties, liability insurance may also be needed. Finally, if possible, drive by the property periodically to make sure that it is being property maintained.

Why Sell A Promissory Note

When you sold the owner-financed property, you may not have ever really wanted to carry a note. Or, perhaps you initially liked receiving payments but now want to get out of the burden or simply need more cash now for other things. For example, you may want to pay off some credit card debt, put a kid through college, or pursue a new business opportunity or hobby. Once you sell a note, you no longer have to worry about the property taxes, insurance, or upkeep of the property.

When you sell a note, there are often different options. There will always be some level of discount when selling the note – meaning that you will receive less than the note’s current balance. The size of the discount depends on risk factors like the type of property, equity and seasoning, payer credit, and the note terms.

You may also want to sell only part of the note. Let’s say that you have a note with a current balance of $150,000 and 14 years of payments remaining. A promissory note investor might offer you $137,000 to purchase all of the remaining payments. However, you may only need $60,000 right now and would like to have a future income stream. In that case, a knowledgeable note buyer may offer you $60,000 to buy the next 6 years of payments. At the end of the 6 years, the note reverts back to you.

What Happens When You Decide To Sell A Promissory Note?

If you decide that you want to sell your promissory note or are just thinking about it, you will want to do a little research to find the best note buyers. Things to look for to get a top note company include:

  • At least 5 years of full-time experience buying real estate notes from note sellers
  • Positive reviews on the Better Business Bureau site and on Google. Seascape Capital has an A+ rating from the BBB, and has dozens of positive reviews on that site and on Google and Facebook.
  • In line with #2, do a search for the company and the individual on your favorite search engine, like Google or Bing. Make sure that previous note selling customers have not written negative comments about them.
  • Is the note buyer a licensed real estate broker in at least one state? While only California and a few other states require licensing, a licensed buyer of notes will have the knowledge and competence to help you.
  • Finally, trust your gut. The person at the other end of the phone line should be knowledgeable about all aspects of the process, be able to answer all of your questions, and be customer-service oriented.

Once you have checked out some note investors, select 2-3 of them to get quotes on your note. As mentioned earlier, the note buyer will look at several risk factors, as well as the loan to value ratio, to come up with an offer. Once you and the note company have agreed on a price, you will be asked to email over copies of documents such as the note, mortgage, and closing statement.

Now, the due diligence process begins – all of which is normally paid for by the note buying company. Typically, the note company will first order a drive-by appraisal of the property. This takes 1-2 weeks. Once that it is complete and approved, the buyer of the note will want to briefly speak with the payer on the note and order a title commitment. This normally takes another 1-2 weeks.

When the steps above are complete, you as the note seller will be sent the closing documents to complete the transaction and to assign your interest in the note to note buyer. You would sign them either at home or at a title company, and return them along with the original note. The note buying company would verify the documents, record the assignment with the county, and wire the funds to you. You will receive the wired funds within 1-3 days after returning the documents, and the note sale is then complete!