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:
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.