Tag Archives: owner financing

What is a Business Note

A business note is similar to a real estate note except that the collateral is mostly an actual business rather than real estate.  Uh huh, so tell me again what is a business note?  Okay, let’s try an example where Shelly Seller decides to sell her printing business to Bobby Buyer.  Shelly leases the property where the property is located, and thinks that the business and its assets are worth $300,000.  Bobby agrees to the price but he does not have $300,000 available and cannot get a loan from his local bank, so seemingly has no way to buy the print shop.  Shelly believes that Bobby would be a reliable payer and capable of managing the business, so she proposes an owner financing arrangement in which she sells to Bobby using the following figures:

Sales price:            $300,000
Down payment:    $100,000
Original note amount:     $200,000
Terms:      15 years, 7% interest rate, monthly payments of $1797.60

Normally, a list of documents are drawn up by an attorney, including one showing exactly what assets are being sold and another stating the terms for payments.  The latter is called the business note, the promissory note, or simply the note.

In this situation, as is often the case, owner financing saved the sale and gave both buyer and seller what they wanted.  Creating a note rather than having the payer get a bank loan is generally faster, cheaper (less upfront fees), and simpler.

Once Bobby starts making payments to Shelly, she may decide that she needs more cash now.  Perhaps she is starting up a new business, needs to pay down some debts, or just wants to take a long vacation.  Shelly could choose to contact a business note investor or broker like Seascape Capital about selling the note.  However, Shelly will want to first make sure that her transaction meets the following minimum requirements:
What is a business note
1. At least a 25% down payment was paid by Bobby
2. Business is profitable now and viable longer term
3. Payer has excellent credit and is capable of managing this type of business
4. At least three monthly payments have been received from Bobby
5. There are no other large liens or liens superior to Shelly’s lien against the business
6. No large balloon payment is required at the end of the term

Business notes are more difficult to sell than real estate notes because of their additional inherent risk.  After all, if the payer defaults, the investor has neither the expertise nor the interest in running the business.  Most business notes that come across my desk are missing two or more of the above elements, which usually means that we cannot buy the note, so it is important to go over the list before closing the transaction.

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.

Selling a Real Estate Note 101: Should I sell my note and what is the process?

There is a lot to consider when deciding to sell a real estate note (also called a mortgage note or promissory note). Last week we answered the question What is a mortgage note?. Here we take a look at some of the common reasons why people may want to sell mortgage notes and walk you through how to sell a note.

Should I sell my real estate note?

Let’s be honest- this is a personal question that only you can answer. What we can do is give you important information about selling a real estate note to assist you with making the best decision possible for you.

Some of the common reasons why people choose to sell a mortgage are:

  1. To receive a lump sum cash payment (often for the purpose of paying off unexpected expenses such as medical bills, tuition, or large purchases, or to make other investments or reinvest at a higher interest rate).
  2. To eliminate the burden of managing payments, insurance, and taxes.
  3. To simplify their estates for their heirs, or in the event of a divorce.
  4. Additionally, selling your mortgage note (or deed of trust note) frees you from worrying about default and foreclosure, bankruptcy of the payor, or the property becoming devalued.

How do I sell my mortgage note?

Once you have decided to sell your mortgage note, you can take the first steps in the process of
selling a note.

To save yourself time and frustration, we recommend that you start by gathering the paperwork and information you will need to provide to prospective note buyers. This will include: knowing the sales price, any lien information, current payment terms and type of payment, and a detailed description of the property. If selling a commercial note, you will also need: leasing information, zoning information, and the environmental history of the property. This will facilitate the process of getting a quote.

Next, you will want to find a mortgage note buyer. It is a good idea to contact several note buyers to establish a comfort level, ask questions and get mortgage note quotes. It is especially
important that you find a trusted note buyer whom you find to be a valuable resource and operates on a high level of honesty and integrity (which we will cover in more detail later in this series).

Every note buyer has their own process, but most should be able to quote you a purchase price and conditions of the sale within two business days or less. Remember, getting a quote does not obligate you to sell to that buyer.

If you are still feeling confused about whether selling your real estate note is right for you, please give us a call so we can answer your specific questions. Next week’s topic will be on how note buyers determine the worth of a note. As always, if you have additional information
to offer or general questions you think others might have as well, please enter them in the comments below and we will be happy to respond.

We hope to see you next week.

Selling a Real Estate Note 101: What is a Mortgage Note (or Real Estate Note)?

“What is a mortgage note (or real estate note)?” may seem like a simple question, particularly if you are currently holding a note. However, there are many individuals who may be holding a note unexpectedly or for the first time, so as a resource to these folks, we will be running a new blog series titled “Selling A Real Estate Note 101” where we will address the basics of real estate notes and how to go about selling a note.

The definition of a mortgage note:

A mortgage note (also called a real estate note or promissory note) is a written document that creates a lien by pledging real property as security for a debt. Mortgage notes go hand in hand with the deed of trust note, which transfers ownership of the property from the seller to the buyer.

The mortgage note specifies: the sum of money to be paid plus interest, the rate at which it is paid until the promise is fulfilled, and assigns the borrower (also called the “holder” or “carrier”) who signs the note personal responsibility for repayment. Other variables, such as interest rate and payment types (balloon or interest only), will depend on the terms of the individual loan.

Types of mortgage notes:

There are a wide array of mortgage loans, ranging from: “conforming” (meaning it meets the purchase limits put forth by the government-backed lenders Freddie Mac and Fannie Mae) and “conventional” (which has not been underwritten and backed by Freddie Mac and Fannie Mae), to “jumbo” (when the purchase amount exceeds the limits established by the government sponsored entities) and “non-conforming” (which does not meet the criteria for ‘conforming’).

Mortgage notes are often associated with sales of property using owner financing, a type of financing in which the seller of a tangible item accepts a mortgage note as a portion of the purchase price (also called seller financing). Often times, owner financing can be a form of financing for individuals who experience difficulties obtaining a traditional mortgage loan through a bank.

Mortgage notes can be carried on many types of real estate properties, including residential, commercial, mobile and land.

Now that we have covered the definition of a mortgage note and the general types of mortgage notes, we can begin to understand the process of selling and buying notes. Our next series topic will address the questions “Should I sell my note?” and “What is the process of selling my note?”, so stay tuned.

Again, our goal is to continue providing you with important and helpful information about this process and hopefully answering your questions along the way. If you have a specific question that you would like answered, we invite you to give us a call today. We also welcome questions and comments below, so please feel free to share your insights and let us know of any mortgage note topics of particular interest to you.