Updated May 2017
Perhaps you’ve recently come across a great investment opportunity or need some extra cash flow to pay down debt. Whatever the reason, you have heard 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 the 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. We 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 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 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.
- It is sometimes expected for the note buyer to require that you pay for the appraisal or the title policy ONLY if the property appraises for less than the sales price or there are problems with the title that prevent the purchase. However, these payments should be clear up front and should cover just the buyer’s actual costs.
- 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.
- Contact us and provide basic information about the note and property (type of property, sale price, payment amounts, etc.)
- We respond within one business day with your quotes
- If you approve the quote, we ask you to send copies of the Deed of Trust or Mortgage, the Note, Title Policy, and Closing/Settlement Statement in order to check the buyer’s credit and 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 2-3 weeks for you to get your money. You can choose to receive the cash via check or electronically.