Full Purchase Note Offer
We have been purchasing notes, mortgages and real estate contracts for over a decade and we pride ourselves on a unique client experience at the best price possible.
What’s a Full Note Purchase Offer? A Guide for Investors
As a note seller, one of the decisions you’ll have to make is whether to enter into a note purchase agreement where the purchase price covers your entire interest in the note or to accept an offer that only gives you part of its value. This decision matters because it can either make you appreciate or regret your choice to invest in real estate.
In this article, we’ll break down what the full purchase and sale of a real estate note really means. So, the next time a potential investor comes sniffing around your promissory note, you’ll know whether to take their full note purchase offer or push back.
What’s a Full Note Purchase Offer?
A full purchase note offer allows the seller or note holder of an existing cash flow instrument (such as a seller carry-back loan or structured settlement) to sell the entire remaining balance or payments owed to them to a third-party buyer for a lump sum of cash.
If a private asset holder decides to sell the entire loan, that is considered a full purchase buy-out. The takes all of the risk out of the hands of the seller/holder and transfers said risk to the third-party investor.
The seller can completely walk away from loan-servicing responsibilities, receiving their money upfront. However, an asset seller will never receive the full amount owed to them in a full purchase buyout. This is due to the many risks associated with servicing and maintaining a mortgage note (or business note), such as the risk of non-payment, declining property or collateral values, and foreclosure, to name a few.
Note buyers must calculate, predict, and offset these risks when pricing a loan for acquisition. This is why factors such as the borrower’s credit score, current property value (not just the sales price), equity in the property, and the down payment collected at loan origination are so important.
In this economy, 4 out of every 10 private loans on the secondary mortgage market do in fact, go into foreclosure (for whatever reason). This is where the mortgage note discount comes into play. When opting for a full purchase option, the discount is always steeper than the discount associated with a partial purchase note offer due to greater risk for the note investor.
What Does a Full Mortgage Note Purchase Agreement Look Like?
Below is a basic draft of a full purchase note agreement for informational purposes. While not an exhaustive representation of a real-world agreement, it includes common clauses typically found in such contracts.
FULL NOTE PURCHASE OFFER AGREEMENT
THIS AGREEMENT (the “Agreement”) is entered into as of the date hereof, by and between [Seller Name], a limited liability company, with its principal place of business at [Address] (the “Note Seller”), and [Purchaser Name], a [State] Corporation (the “Note Purchaser”).
WHEREAS, the Note Seller desires to sell the note, and the Note Purchaser agrees to purchase from the company certain real estate notes and related collateral;
NOW, THEREFORE, in consideration of the mutual covenants and promises set forth in this Agreement, the parties agree as follows:
- Purchase and Sale of the Notes
1.1 The Note Purchaser agrees to purchase from the Company the real estate note, which is secured by real estate and identified as follows:
- Executed Note: [Loan Number]
- Principal Amount: [$XXX,XXX]
- Maturity Date: [MM/DD/YYYY]
- Interest at a Rate: [X.XX%] per annum
1.2 The sale of the notes shall be conducted in accordance with the terms and subject to the terms set forth in this Agreement.
- Consideration and Payment Terms
2.1 The principal amount of the note shall be due and payable as set forth in Section 3. Interest shall accrue on the real estate note at an annual rate of equal to the greater of [X]% or the minimum required under applicable law.
2.2 The Note Purchaser shall remit payment to the Note Seller in immediately available funds by wire transfer to the account designated by the Company on or before the date and time agreed by both parties.
- Security Interest in Real Property
3.1 The real estate note is secured by the property described in the mortgage deed recorded under [County/State].
3.2 The obligations under this Agreement shall be deemed fully enforceable under the laws of the state where the real property is located.
3.3 The parties acknowledge that the purchase money note is issued as part of a real estate investment and may be structured as a purchase money mortgage under applicable law.
- Representations and Warranties
4.1 Seller’s Representations. The seller of the note represents and warrants that:
(a) The notes issued are valid and binding obligations of the borrower.
(b) The real estate note is enforceable under applicable law.
(c) The note holder has not entered into any agreement or understanding, whether written or oral, whether now existing or hereafter arising, that would impair the transfer of rights under this Agreement.
4.2 Purchaser’s Representations. The purchaser agrees to purchase the real estate note as an investment, with full awareness of the associated risks of investing in real estate notes. The purchaser must conduct thorough due diligence prior to closing the transaction.
- Assignment and Transferability
5.1 The purchase of notes is made in reliance on the exemptions provided under the Securities Act of 1933 and is not intended to be a public offering.
5.2 The obligations under this Agreement may be amended only by an agreement in writing signed by both parties.
- Tax and Compliance Obligations
6.1 The Note Purchaser shall submit a Form W-9 on or before the date hereof for tax reporting purposes.
6.2 The Note Seller shall comply with all federal, state, and local tax laws applicable to the transactions contemplated by this agreement.
- Governing Law and Dispute Resolution
7.1 This Agreement shall be governed by the laws of the state of [State]. Any disputes arising hereunder shall be resolved in a court of competent jurisdiction.
7.2 The parties agree that this Agreement does not create an attorney-client relationship, and all business contracts herein are made on a commercial basis.
- Miscellaneous
8.1 This Agreement shall mean the entire understanding between the parties and supersedes all prior negotiations, whether existing or hereafter arising.
8.2 If any provision of this Agreement is deemed unenforceable, the remaining provisions shall continue in full force and effect to the extent permitted by law.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above.
Final Thoughts: Should You Make or Accept a Full Note Purchase Offer?
When a borrower signs a promissory note, agreeing to repay the loan at the stated interest rate, neither the borrower nor the lender can predict the future. Over time, circumstances may lead to the note being sold to individuals or companies that invest in notes.
If you’re on either side of the transaction, there is nothing wrong with making or accepting a full note purchase offer. However, it’s important to carefully consider the terms of the note, the interest payments, and the borrower’s repayment history before setting or accepting a price. If the promissory note is secured, note investors should also ensure that their lien on the collateral remains protected.