You may have heard that you can sell a mortgage note but are not sure how the process works or how to ensure that you get the best deal when working with private mortgage buyers. Perhaps you want to sell all or part of your note to pay down some debts or because you have come across a great investment opportunity. Whatever the reason, you know that you can sell your promissory note (more often called a mortgage note), but you aren’t quite sure how it works or how to ensure that you get a good deal when working with private mortgage buyers.
In a previous article, we discussed how to structure a real estate note to help you obtain the maximum value from it. Let’s say that the note has now been set up, you have received at least one payment from the property buyer, and now you’ve called a real estate note buyer like Seascape Capital to sell the mortgage note.
The first thing that most note sellers think about is selling the entire note. If that scenario fits your financial situation and the note is likely to fetch a high value, you may want to go down that path.
But wait, you should at least understand other options in order to choose the one that is the best fit. Sometimes, note sellers like the interest rate that they are receiving on the note, but just want to obtain some amount of cash now. Or, what can you do if your note doesn’t meet some of the criteria needed to obtain a high value (i.e. good equity and strong buyer credit)? It is possible, and often to your advantage, to just sell some of the payments. This is called a partial, and it can often provide you with a much higher rate of return.
An example can help here. Assume that you sold a house for $120,000, the buyer gave you $20,000 as a down payment, and you have a $100,000 note at 7% for the next 15 years (180 months). You enjoy getting the income each month but need $30,000 for another investment or to pay off debt. The note buyer could give you that $30,000 in exchange for buying the next “x” number of payments, after which the note reverts back to you for the remainder of the term.
There are also other ways to structure the note sale to meet your needs, such as getting a lump sum of money now plus receiving a part of the payment each month thereafter. A knowledgeable note buyer will be able to explain these to you in more detail.
By the way, the items that are described above and in the previous article apply mainly to 1st liens. If you have a 2nd lien, where there is a bank or another investor with a more senior lien against the property, you may be able to sell the note, but the price that you receive won’t be nearly as high. You generally won’t be able to sell those types of notes at any sort of decent price unless the buyer has put in at least 30% of his own money as a down payment or in built-up equity.
So, now you’ve received quotes for a full buyout of the note and a partial purchase, and have selected the one that best fits your needs. Since the note purchasing business is lightly regulated, you do need to be careful to work with a reputable note investor or broker. Here are some things of which to be aware:
- Check to make sure that there are no upfront fees. An ethical note buyer isn’t going to charge you just to provide quotes or check the buyer’s credit.
- There should be no points, closing costs, or other garbage fees at any point in the process. With rare exceptions, any fees should already be included in the pay price to you.
- The note buyer will almost always be paying for the drive-by appraisal and the title commitment.
- Ensure that the seller gives you a written purchase agreement covering the purchase price, contingencies, etc., and be certain to ask questions about anything that is not clear.
- Be certain that the note investor checks the credit of your property buyer upfront. There have been cases of unscrupulous buyers quoting one price and then lowering it toward the end of the process, often using the excuse that the “property buyer’s credit was low”. This “bait and switch” method is definitely not ethical.
So, what are the steps involved in selling your note? The process is simple and straightforward:
- Contact us and provide basic information about the note and property (type of property, sale price, payment amounts, etc.) either with our mortgage note application or by phone.
- We respond within one business day with our offers for you.
- If you approve the quote, we ask you to send copies of the Deed of Trust or Mortgage, the Note, Closing/Settlement Statement, etc. in order to conduct our due diligence. If there is no recent appraisal or title policy, we arrange for those, at our expense.
- From the time that you approve the quote and provide the documents, it generally takes 3-5 weeks for you to get your money. You can choose to receive the cash via check or electronically.
- Does anything change for the payer on the note when it is sold?
No. The payer will have the same interest rate, payment amount, due date, etc. The only thing that changes with the sale of a note is where the payer is sending the payment.
- Why do you need to check the credit of the payer?
We have found that, in general, payers with strong credit scores and history are less likely to default than others. The note holder will receive a much better price on the note if the payer has excellent credit.
- Does the offer price ever change from when the agreement is signed until closing?
While this does not happen very often, it can occur if an appraisal comes in low, there are issues with title, or other surprises come up of which the note buyer was not made aware. If the price changes, the note holder has the option to walk away without penalty.