Selling a promissory note should not be a complicated undertaking. In fact, the overall process can be smooth and hassle-free when you prepare accordingly and use reputable note buyers or experienced note buying companies. As a leader in loan acquisitions and buying promissory notes, we have put together this functional guide to help you understand the in’s and outs of “How to Sell a Promissory Note.” First, let’s lay the groundwork with some background information on notes in general.
What is a Promissory Note?
A promissory note is an agreement between a seller and a buyer, or a lender and a borrower, that lays out the terms and conditions of a transaction. It acts as a promise that the buyer (or borrower) will follow-through with a set plan for repayment. However, a legal and proper promissory note is not a simple IOU. When prepared properly, they are official financial documents that are fully binding under the jurisdiction where they were entered.
Most traditional loan agreements like promissory notes (aka mortgage notes), especially in real estate or business loan transactions, are accompanied by a collateralizing document such as a mortgage, deed of trust or chattel mortgage (chattel used for personal property items), depending on the state in which said loan was originated. In this case, the promissory note acts as the document that represents the loan repayment terms such as the payment amount, interest rate and amortization period, whereas the securing mortgage or deed of trust outlines the collateral securing the promissory note in question, such as the property and property laws under that specific state. Thus, the two documents make up the legal debt instrument.
Other types of Promissory Notes
Although, promissory notes are predominately the same instrument used throughout the entire secondary mortgage market, there are minor differences in usages and applications. For instance, a consumer promissory note is an instrument that is either secured or unsecured. A consumer promissory note could be used for the purpose of a consumer lending transaction such as a borrower-occupied home or some type of personal property like a vehicle as an example.
Other examples of different promissory notes would be an escrow promissory note or escrowed promissory note. An escrow promissory note is a type of mortgage loan that contains an agreed-upon, principal and interest payment which also include monies for real estate taxes and insurance rolled into one. When taxes and insurance are collected along side a mortgage payment, this is referred as escrowed in the mortgage business.
Why Is a Promissory Note Used?
With the recent news of rising mortgage rates, seller-financed, owner-financed, or installment sales of property (both residential and commercial) should increase. Rising mortgage rates make sales difficult for both buyers and sellers alike. Buyers with less-than-perfect credit will seek ways around dealing with traditional lenders and their strict lending guidelines. Higher mortgage rates also mean that there are fewer highly-qualified buyers in the buying pool. Sellers can bypass the traditional lending route and use promissory notes to self-finance transactions.
Who Uses Promissory Notes and How Do They Work?
Buyers – Promissory notes are advantageous to buyers who do not qualify for traditional mortgages because the seller acts as the bank and finances the loan. The trade off is a higher interest rate since the seller assumes a higher risk. The home (or business) serves as the collateral and an agreed upon down payment is the security for the note. As long as the buyer makes the agreed payments, they continue to be owners of the home. Should they default, the seller can take back, or foreclose on, the property.
Sellers – There are myriad reasons why a seller would choose to use a promissory note, also called carrying back a note. Sometimes when selling a mortgage, it is the only choice available if they want to sell their home or property quickly. Family members often use promissory notes for ease of transferring and selling property, such as with tracts of farmland among siblings. Or, note holders may have acquired promissory notes through divorce proceedings or inheritance. In some jurisdictions, a promissory note provides some advantage to the seller, such as being able to transfer the ownership of the note easily or being able to enforce the note more readily when and if a borrower defaults.
Why Should I Sell A Promissory Note?
Deciding to sell a note to a note buyer or a note buying company is one way to turn a non-liquid asset into a liquid asset in a short amount of time. Many sellers simply don’t want the risk of carrying a note long-term, and structure the sale with the intent of selling real estate notes as soon as possible. Even though they know note buyers and note buying companies discount the price of notes to offset their risk based on the characteristics of the loan structure, sellers would rather have one lump sum of cash rather than taking in payments over time and waiting thirty years for a return on investment.
Sometimes they do not want the hassle of dealing with the IRS or the responsibility of managing the records and paperwork to keep track of the receivable asset they service. They could have an unforeseen emergency like medical bills or school tuition that may require them to liquidate the asset for cash in a timely fashion.
How to Sell a Promissory Note
There are several factors involved in selling a note successfully. If selling a residential, commercial, or business note is in your near future, here are a few things to consider.
If a seller should choose to use a promissory note, or if one is obtained through other means, other documents that may be present with a note are a Deed of Trust or a Real Estate Contract. All of the documents together represent the evidence of a transaction that can be used for legal and financial purposes such as sale or transfer. It’s important that all of the documents related to the sale be presented so record-keeping is critical. This includes records of the down payment, number of payments made, taxes paid, insurance payments and policies, and all the specifics of the original note.
Where to Sell a Promissory Note
Deciding who to sell your note to is one other decision that must be considered. Individuals will sometimes buy notes, although it is difficult to find individuals with enough cash on hand for such purchases. Individual note buyers often lack the experience to and know-how to make efficient deals, so proceed with caution. Another option is to sell or transfer to someone you know, such as a family member. Finally, you can find reputable note buying companies with established track records of buying notes. This is often the quickest and most seamless option. Do a search online or obtain a referral from your banker or realtor.
Getting A Quote for a Promissory Note
To get a quote for a note buyer, you will need to answer a series of questions pertaining to the property. Prepare to provide information such as the property type, the property value, the buyer’s information, the buyer’s credit, the down payment amount, whether there are liens, and how many payments have been made. After you supply this information, the note buying company will either offer you a partial purchase of a portion of the future payments, or a full purchase of the remaining balance. Remember that this amount will not be the full balance of the loan and is typically 65% to 90% of the value. The note buyer is assuming all of the risk of the loan. If you agree to the offer, the company will request the note paperwork and do an asset verification (collateral verification).
Underwriting and Closing on a Promissory Note
Once the buyer receives all of the paperwork for underwriting, they will have an appraisal and do a title search performed during the course of the due diligence process. You should be sure that the company you work with is willing to pay for the costs associated with the purchase of your mortgage asset, including appraisal, BPO, and title fees. With a clear title search, the closing can be scheduled either in person or via FedEx or UPS (if the note seller is out of state). The final step occurs when the seller receives their payment via wire transfer or check. The entire process can take anywhere from 15 to 35 days depending on your location, where the property is located, time to appraise, etc. Overall, a relatively quick process from start to finish in real estate terms.
As you can tell, the question of “how to sell a promissory note” is a loaded one. There’s a lot of expertise and knowledge used to properly handle every kind of promissory note, but we hope you’ve left with a basic knowledge of how to sell a promissory note! If you have any questions or would like a quote, feel free to contact a note buyer today!