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Selling a Real Estate Note 101: Best tips for selling and buying a mortgage note

Welcome back to our series “Selling a Real Estate Note 101”. If you have been following along, hopefully you have gained a basic understanding of what is a mortgage note, the process of selling your mortgage note, how the value of your note is determined, what to look for in mortgage note buyers, and some knowledge of your note sale options. If you would like more information on any of the above topics, please call us directly so we can help answer your questions.

Now that we’ve covered the basics, we wanted to summarize the most important tips for selling a mortgage note (also called a real estate note or promissory note), and helpful tips on how to create a mortgage note for a future sale.

Best tips for selling a mortgage note:

  1. Familiarize yourself with the process of selling a mortgage note, how the worth of your note is determined, and what to look for in a mortgage note buyer- BEFORE you start requesting quotes. Having your paperwork and questions on hand when speaking with potential note buyers will facilitate the process of negotiating the sale of your note.
  2. Explore your options; every mortgage note is different. For example, selling only some of your payments (known as a partial) may be more advantageous for you and may offer a higher rate of return. A trusted and reputable note buyer can help you determine your best options.
  3. Verify that there are no upfront fees to the seller (with few exceptions), as these are already figured into the purchase price.
  4. Make sure the mortgage note investor checks the credit of the payor/buyer upfront to avoid any sudden drop in purchase price quotes due to unforeseen credit issues.
  5. Review your written purchase agreement with a Real Estate Attorney, if possible.

Seascape Capital Best Tips for Selling and Buyer a Mortgage Note

Tips on creating a mortgage note for owner financing (also called seller financing):

If you currently hold a note that you may consider selling in the future, one option is to sell your real estate note to a buyer using owner financing. Some of the common reasons people choose owner financing include: attracting more potential buyers for your property, offering more flexible terms (often the case when working with buyers who are not able to obtain financing through a bank), or managing a sale between family members or as part of a divorce agreement. These tips can help you create value and structure your mortgage note for an optimal sale through owner financing.

  1. The larger the down payment, the better. For residential, a down payment of 10% is ideal, 20-30% for commercial notes.
  2. The more equity in the property, the better. This is achieved, in part, with the down payment mentioned above, as well as principal payments received. This adds value to the mortgage note.
  3. Consider the credit of the buyer and always obtain a current credit report. Ideally, the credit score should be 600 or above (the higher, the better). Their credit rating can influence the value of the note and can play an important role in determining a down payment to protect your property.
  4. Make sure that the sales price is aligned with current market values and that interest rates are comparable to bank rates.
  5. As with most real estate, the condition of the property is another important consideration when creating value for your note. A note will be worth more when the property is in good condition, located in a desirable area (with access to power and water if it is a land contract), and is currently owner-occupied and well maintained.

Whether you want to sell your mortgage now or in the future, we hope you find these tips helpful. If you have any insight that you would like to offer our readers based on your experiences with selling notes, or would like us to address any particular topics of interest, please share them in the comments below. As always, thanks for reading and please feel free to pass this information on to others!

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Selling a Real Estate Note 101: What is my promissory note worth?

As we explore the topic of how to sell a real estate note, one of the biggest questions every note seller has is What is my note worth? To answer this important question, we will take a look at some of the factors that go into determining the worth of a real estate note, what you should know as a seller to get the maximum sale price for your note, and the typical time frame it takes to get your cash payout.

What is my real estate note worth?

The value of your real estate note (also called a mortgage note or promissory note) is dependent upon several variables. While the particulars of each individual cash note and note sale are different, here are the most important factors that determine a note’s worth:

  1. The amount of equity in the property. As a percent of the property value, this includes the down payment and length of time that the mortgage has been paid into (or mortgage seasoning). Generally speaking, the more money that has been paid in, the better the quote you will receive.
  2. The structure of the promissory note. The length of time and payment schedule of a mortgage note is a consideration, since payments received at a future date are less valuable than payments received sooner. Another important factor is the interest rate specified on the mortgage note.
  3. Type of property. Risks are inherent to every property and note type. Single-family houses typically have the lowest associated risk and can usually be quoted higher than real estate notes on commercial buildings, mobile homes, or vacant land.What is My Motgage Note Worth- condition of property
  4. Condition and location of the property. The condition of the property and surrounding areas, and location of the property are important factors in determining both market value of the property and value of the mortgage note. It is beneficial when a property is owner-occupied and when land has access to water, power and roads. For commercial notes, it may be harder to sell the note if the property has a higher potential of liability to the note holder due to its environmental history and potential consequences (for example, if a property was previously a gas station). Commercial notes are also more desirable when they are multi-unit apartments or general use office buildings, as opposed to specialty businesses.
  5. Lien notes. Usually, 1st lien notes are considered more valuable than 2nd lien notes because there is a much higher risk to the holder of a 2nd lien note.
  6. Credit rating and payment history of the buyer. In the case of a partial purchase, it is important that the note seller consider the credit rating of the property buyer. A FICO (credit score) of 680 or better is ideal. A lower credit score with a solid payment history may still work, but a credit score below 600 typically requires the note seller to sell their note at a larger discount.

Again, these are just some of the important variables taken into consideration when determining the worth of a mortgage note. We understand that selling a promissory note at a discount is a common concern for sellers. If you would like additional suggestions on how to structure your mortgage note for maximum value, please read our Tips on Creating a Real Estate Note. As a general rule, however, the higher the interest rate and shorter the term of the mortgage note, the less of a discount a seller would need to take when selling their note. If you would like to talk to us directly to discuss your specific options for minimizing a discount on your mortgage note, please give us a call today- we are happy to help answer your questions.

How long does it take to get the cash payout from selling my note?

Once you have decided to sell your mortgage and accepted a quote from a mortgage note buyer, you will likely need to provide copies of the Deed of Trust or Mortgage, the Note, Title Policy, and Closing/Settlement Statement. If there is no recent appraisal or title policy, the mortgage note buyer should offer to arrange and pay for those services.

Although it may vary slightly by mortgage note buyer, once the paperwork is processed and completed, it generally only takes about 2 weeks to get your money. Your note buyer should give you the option to receive the cash by check or electronically.

If you have sold a mortgage note recently, we would love to hear about your experiences in the comments below and what you found to be most helpful when determining the worth of your note. We also hope you will join us again next week as we Continue our series of Selling a Real Estate Note 101, where we will be looking at the different types of mortgage note buyers, as well as giving tips on what to look for (and look out for) in a mortgage note buyer.

Should You Invest in a House or Mortgage Note?

Since early 2005, I have advised friends, colleagues, and anyone else who would listen not to buy real estate.  While I make no claims to uncommon brilliance or being able to foretell the future, I am somewhat of an information junkie.  When I looked past all of the happy-talk headlines and examined the real data, I surmised that there was no way that property values could go anywhere but down.  Nobody could know exactly the timing or the size of the collapse, but I knew that it would be big.  Unfortunately, the level of incompetence among regulators and greed among bankers made the crash worse than most anyone expected.

For people with money to invest, these are tough times.  The stock market has been incredibly volatile and recently declining, so buying stocks feels like wagering in Vegas.  Bank accounts, CD’s, and other safe interest-bearing accounts pay next to nothing for holding your money.  Actions from the Fed show that they want to keep rates low, and to heck with those who save money.

What about buying a house either to live in or as a rental?  For the former, the financial part is only part of the question, as you’ll of course want to consider neighborhood quality, school district, access to interesting places and shopping, etc.  On the plus side for buying a house is that housing prices are much cheaper than they were five years ago and that interest rates are at record lows.  The negatives for house buying are that prices in most areas will continue to decline (in my opinion) and that the economy is rapidly becoming a train wreck.

People considering buying a house as an investment face some of the same issues.  One big plus though is that rents are slowly rising and vacancies declining in many markets.  With banks keeping lending tight and thus fewer Americans qualifying for loans, this would logically lead to a greater need for apartments.

There are other ways to buy real estate, with my favorite being mortgage notes.  I’ve written numerous articles and blogs in the past about how to buy a mortgage note (a.k.a. real estate note).  Note buyers like myself have always been careful to diligently check documents, property condition, payer credit, etc. before buying a note.  Now, we have to make educated guesses about where the real estate market is headed and what government regulations and policies will creep into the mix.  Being a mortgage note buyer has never been more difficult.

For investments in real estate and elsewhere, these are such dangerous times that you have to understand your down-side risk.  If the value of your investment declined, you need to still be able to pay your bills and keep food on the table.  My research and gut instincts tell me that these rocky times will be with us for several years, so plan carefully.