Mortgage loans, as we know them today, date back to the 1930s, when FDR’s New Deal created the Federal Housing Administration, and with it, FHA-backed home loans.
But when strict FHA lending standards boxed some would-be home buyers out, many Americans turned to private mortgage notes instead — seller-backed financing that offered looser qualifying requirements and faster closing times, among other major benefits. As these private forms of financing took off, so did note buyers — companies that buy mortgage notes for long-term profit.
By the end of this article you will know that:
- Mortgage notes have become popular due to increasingly strict lending rules at established mortgage lenders.
- Mortgage note holders sell their notes for cash if they no longer want to manage the loan or bear its risk, or need cash for new investments or costs such as health care, tuition or debt.
- Note buyers will typically offer $0.70 to $0.90 on the dollar for mortgage notes; this margin is what incentivizes them to take on the risk and management of a mortgage.
The rise of private mortgage notes
Private mortgage notes grew in popularity as FHA standards got more stringent. Not only did private mortgage notes allow previously shut-out buyers to purchase property, but they also made it easier for sellers to offload less marketable real estate — and fast.
To this day — and especially in our tight post-housing crisis lending environment — this type of seller-financing is still a popular option for buyers with less-than-perfect credit or sellers with less-than-ideal properties. And as private lending usage has increased, the number of investors — and eventually entire companies — that buy and sell promissory notes has grown as well.
Why sell my note?
Creating a private mortgage note is often a short-term solution for sellers. They’re either hoping to sell an unmarketable property, help a friend or family member gain entry to homeownership, or allow a non-traditional buyer to purchase a home. Whatever the reason, seller-financing gives them a quick and easy way to accomplish their goals.
Unfortunately, most sellers quickly realize that, though they wanted to sell their property, they did not want to manage payments or wait years (or even decades) to cash in on the home’s value, as seller-financing requires. Thus, they seek out a note buyer who can take the note — and its tedious management — off their hands for a quick cash offer.
Generally, mortgage note holders tend to sell their notes for one or more of these reasons:
1. They no longer want to bear the risk of the loan.
2. They no longer want to manage the payments or the buyer relationship.
3. They need extra cash flow to pay for additional real estate or investments.
4. They need funds to cover medical costs, college tuition or other expenses.
5. Their buyer is unwilling to refinance into a traditional loan product.
6. They want to pay down other high-interest debts using the note profits.
No matter their impetus, note holders can see fast, hassle-free financial gain from selling real estate notes to a qualified and knowledgeable buyer, as well as avoid the risk and tedium of managing a private loan.
Why companies buy notes
So, what’s in it for these companies that buy mortgage notes? As with any business, there’s profit to be gained from purchasing and selling private mortgage notes. Note buyers purchase private mortgage notes at a price that will allow them to make their money back — and then some — once the loan term is up or when the property or loan is re-sold. Note buyers, like any real estate investor, are looking for high-yield notes that offer a solid return on investment.
There’s also a low amount of risk in note buying. Real estate has a long-running reputation as a safe investment; plus, its physical property serves as collateral for any deal gone awry. The investor always has the option to sell the property on the open market and make his or her money back — or even more than that.
How to sell a note on real estate
If you’re looking for a company to buy your mortgage note, make sure to do some research first. While there are a number of note buyers on the market, not all of them are experienced in the space, and most of them only purchase very specific types of notes (and even then, for a fraction of what others will pay for them).
Look for a note buyer that has diverse experience, verifiable reviews/credentials, offers commitment-free (and cost-free) quotes and has customer service representatives available to answer questions, address your concerns and walk you through the process from start to finish.
If a note buyer ever makes you feel pressured or under-the-gun to take their offer, that is not a reputable company you want to be working with.
How much is a mortgage note worth?
A mortgage note’s value depends greatly on the terms that the seller and buyer agreed upon, as well as some financial factors. Typically, a note buyer will look at all of the following factors when determining a note’s overall worth:
1. The down payment the buyer initially put on the property
2. The buyer’s credit score and history
4. The length of the loan (5 to 10 years is ideal for most note buyers)
5. The loan’s interest rate
6. Any personal guarantees made on the loan
7. The buyer’s payment history on the loan — and the quality of the records tracking those payments
8. How many on-time payments have been collected to date
9. Details in the contracts and closing documents
Keep in mind, a note buyer doesn’t offer sellers the full worth or balance of their notes, as this would prevent any sort of long-term profit or ROI. In most cases, note buyers will offer between $0.70 and $0.90 on the dollar, depending on the above-mentioned factors. This is usually a cash offer which can be transferred or wired to the seller within a few days if not weeks.
Are You Considering Selling-financing or Offloading Your Mortgage Note?
If you’re thinking of seller-financing a property to accomplish your investment goals, then make sure you structure your asset with a mortgage note buyer in mind. This will help you get top dollar when you’re ready to sell the note to a buyer or investor.