Selling a mortgage note is a streamlined and straightforward process. A person or entity collecting loan payments has the ability to sell a mortgage note for a lump sum of cash today, instead of holding the loan long-term over many years. You can choose to sell all, or just a portion of your note, depending on your capital needs. We will take a deep dive into the sale process as well as fully explore all options and pricing factors below.
How is market value determined on a real estate receivable being sold to a note investor on the secondary mortgage market? This is a question that comes up many times daily in this industry. There are many primary and secondary variables that come into play when determining the value of a real estate receivable for sale. Below is a list of items that sellers should be aware of when taking their asset(s) to market:
Down Payment (primary variable): This piece of information is at the top of the list for investors when calculating the present-day value of a promissory note for sale. Not only does this variable determine how much money one would receive, but also it identifies if the seller-financed loan can even be sold at all. The more money you collect as a down payment when you sell a property and create a promissory note, the more likely you will see interest in selling said asset down the road – plain and simple. The down payment determines how much equity the borrower has in the property (referred to as Loan to Value or LTV), thus determining how secure that loan would be as an investment in an investor’s portfolio.
Credit Score of Borrower (primary variable): Ninety percent of the time, credit score comes into play when pricing a note out for purchase. The higher the credit score of the borrower making payments, the higher the chances the seller will have, pertaining to many offers, when selling said asset to an investor. It would be wise to review the credit of the person purchasing a property from you, if you plan on creating a mortgage loan to sell to an investor. Many sellers make the mistake of not pulling credit up front. Months or even years after the loan is created, they found out that the person making payments has credit so bad that the note cannot even be sold at all.
Loan Terms and Amortization (primary variable): The loan terms and the amortization are also key factors in figuring out what your asset will sell for when taken to market. The long and short of it is as follows:
Interest Rate – Interest rate is a key mechanism of determining how much money one would receive if/when they sell a real estate note to an investor. The interest rate should reflect the risk that a seller is taking by seller-financing the property in the first place. The higher the interest rate, the higher the lump sum payment will be when the asset is sold.
Amortization / Pay-Back Period – This is another MAJOR factor when determining the amount of money one would receive when selling notes to an investor. The longer you stretch the payments over time, the less money you will receive when selling a seller-financed loan. The shorter the payback period, the more money you will receive. Just to clarify, a 30-year payback period (with no balloon) is not great for note offers. It is actually the worst thing you can do if you are trying to get top dollar for your asset. A 10-year payback period (with no balloon) is the best thing you can do if you are planning on selling the note you create to an investor. It is always recommended that you try to stay between a 10-year and 15-year payback period (or amortization) in order to receive top dollar for the asset you are selling.
Balloon Payments – When selling real estate notes balloon payments are viewed by some investors as a good thing and by others as too risky to buy. With the new regulation that affects balloon payments in seller-financed notes (Dodd-Frank Wall Street Reform Act), it is suggested that balloon payments be avoided altogether. If you want to include a balloon payment, you will have to hire a licensed mortgage originator within the state where the property is located. We do not mind balloon payments, as they do not make a huge difference in pricing when we buy mortgage notes.
Personal Guarantees (primary variable ONLY if the borrower is a corporation): A personal guarantee only comes into play if you are selling your property (and creating a note) to a corporation that is not publicly traded on the stock market. If the corporation is a private S-Corp, C-Corp, LLC, LP or Trust, it is recommended to get a written personal guarantee from one of the officers of the company to ensure that payments will continually be made if the corporation is no longer able to make the payment. Not getting a personal guarantee when selling to a corporation borrower can cause you to receive tens of thousands of dollars less in the offer you receive. It is that important! Again, this is ONLY if you are going to collect payments from a private corporation. A personal guarantee is not needed if the borrower is a private individual.
Payment History and Seasoning of Loan (primary variable): In order to receive top dollar for your mortgage loan, at least 6-12 payments must have been collected. We can still buy the loan if there are less than 6 months of payments made, but you may not receive absolute top dollar. It is also suggested that you collect all payments from the borrower by check, direct deposit or money order. If you plan on not depositing checks or money orders into your bank account, always, always make photocopies for your records. Payment history is usually the backbone to a loan sale due to poor borrower credit or lack of equity (or both). Always make copies. It is a good habit to get into if you are acting as a lender on a real estate receivable.
Record Keeping (secondary variable): Always treat your original mortgage documents as cash. The reason why is that they are exactly that – an IOU. If you lose or misplace your original promissory note, you may risk not being able to sell the note at all, as most states do not include them in the recorded databases. The document is equivalent to the pink slip of an automobile. If you are trying to sell a car with no pink slip, the new owner cannot legally take possession of it. The same rings true to mortgage note assignments. The cleaner the records you keep, the easier your sale will go when selling your loan on the open market.
Using a Title Company to Close Your Property Sale (secondary variable): When selling your property and creating a note, it is always wise to use a title company or an attorney’s office to ensure the proper protocol is taken when transferring real estate to a borrower. The title company can insure clear title via a title insurance policy, which is very important. The title company can also take care of the language in the promissory note and security instrument according to the laws of your specific state. Trying to save a buck by cutting this corner will ALWAYS bite you in the end. It is NOT worth it and it makes for a sloppy loan sale down the road. Also, when cash exchanges hands surrounding the down payment, everything can be tallied and viewed on a HUD-1 or Settlement Statement, which proves that you collected money on the down payment.
Sale Options when Selling a Mortgage Loan
How to sell mortgages? There is a wide range of options available to sellers who decide to take their debt instrument to market:
Full Purchase Buy-Out: A full purchase buy-out is when a seller of a mortgage asset sells the entire note, receives the most money possible up-front (determined by the characteristics of the asset), and then has no further risk or servicing responsibility whatsoever. This then leaves the seller to move on with their financial goals.
Partial Purchase Option: A partial purchase option is the purchase of a portion of the note with regards to the payment stream or possibly the balloon payment (if any). For instance, Amerinote Xchange can purchase 2 years, 3 years or even 15 years of payments on the asset for sale. Once we collect the agreed amount of payments, the remaining balance, principal and interest revert back to the original seller, which occurs automatically and on our dime. While sellers would receive a smaller amount of money up-front, they would receive much more money over the life of the loan due to the interest collected.
Split Buy-Out: A Split Buy-Out is the entire purchase of the note in 2 or more lump sum stages. It usually consists of a lump sum at the closing of the sale and then scheduled lump sum payments at future dates until the sale is complete. A note sale is usually broken up this way for many reasons, although the most common is due to poor performance of the borrower and/or property market securing the asset. This option is also a winner for sellers looking to minimize the tax liability exposure in any one given fiscal year.
Reverse Partial Buy-Out: A reverse partial buy-out is the purchase of a portion of a note, although the investor does not start collecting until a later date. For instance, a seller will receive a lump sum of cash at the closing of the sale and then continue to collect payments on said asset for a set amount of time. This will allow the seller to benefit from the interest received on the payments, as well as the lump sum they received previously at the closing of the transaction. At an agreed-upon future date, the investor will then start collecting on the payments typically through to maturity. In some very rare cases, the note will revert back to the original seller and a further date down the road, once the investor has concluded their allotted portion of the collection of said payments.
How to Sell a Mortgage Note
Here are the simple steps to selling a mortgage note
Gather all of the details on the mortgage note you want to sell
Provide the details to the buying entity for a free quote
Decide if the amount offered is right for you and proceed with the sale
The buying company will perform the diligence and underwriting process
The buying entity will fund the transaction the note seller will receive their cash
I want to sell my mortgage note but where do I start? The process is actually very simple for the note seller. Before you begin the note sale process, make sure you have all of the necessary information to receive a mortgage note quote. This will include the property address, the loan amount, the interest rate, the payback period and the creditworthiness of the homeowner. If you are not sure, or you are missing any information pertaining to the note for sale, please feel free to contact us and speak to a live person to answer your questions directly.
This entire process of selling a mortgage note will take anywhere from 15 days to 30 days depending on the state/property location, the availability of the local appraisers, the availability of the title companies providing the title search, etc. We pay for ALL costs associated with the purchase of your mortgage asset, including appraisal, BPO, and title fees.
How to Find the Right Buyer
Now you know the steps of selling your mortgage note, but you may still be left wondering how to sell my real estate note for cash and find the best buyer.
It’s enormously important to gauge different buyers’ offers for your note. After all, the value of a mortgage isn’t static; it can change from day to day alongside fluctuating national interest rates.
On top of that, you should ensure the mortgage note-buying company you work with has certain qualities that will make you feel at ease offloading your note.
The first and perhaps most important quality should be trustworthiness. No one wants to become involved with an organization that seems to be trying to scam them out of something, be it money or an opportunity. A good mortgage note-buying company should offer you a quote for your note without trying to get you to sign something first. In this same vein, remember that a reputable mortgage note company will examine the mortgage note itself to determine its value; if a company begins looking at you, the seller, and your own credit history to judge the value of your note, that company is probably not reliable. The buyer’s credit score informed the terms of the note. Your own background should be irrelevant.
Another point to keep in mind is that note buyers typically do not buy mortgage notes at full price, or 100 cents on the dollar. Companies incur their own costs in purchasing your note, such as appraising your property and searching its title. They will want to recoup these costs somewhere, and the easiest way is by discounting the price of your mortgage note. However, beware of companies that attempt to lowball you on your note.
Do the Right Mortgage Buyers Increase Your Success Rate?
How do I know if I’ve found the right company to buy my note?
There are many ways to determine if you are dealing with a “real” and professional mortgage note buyer who will treat you fairly and give you the best price for your note. Here are some things to keep in mind:
Professionalism: Does the buyer you contacted seem professional? Do they compose themselves in a professional manner? Would you trust this person’s ability to assist you in getting you the monies needed when selling your asset?
Direct Note Buyer vs. Note Broker: Is the company or person you are dealing with a direct note purchaser or a broker? Working with a broker is not a bad thing, as there are many who are worth their weight in gold. That being said, working with a direct buyer means you will probably save money on the broker fee that could range between $2,500 and $10,000, depending on the note in question. Working with a direct buyer will ensure that you get the best offer possible – always. Working with a good broker means you will have to do less work looking for a quote. Many sellers prefer working with a direct funding source like the team set up here at Amerinote Xchange.
Accreditation: Does the company you are working with have a Better Business Bureau Accreditation? Amerinote Xchange has an A+ rating with the BBB. If they do not have one, move on.
Gut Feeling: Go with your gut. Do you feel the company is on the up-and-up? Does it sound like they know what they are talking about? If your gut tells you otherwise, hightail it out of there.
From our extensive experience and in-depth understanding of the secondary market, it is a fact that the difference between getting a note deal funded and exceeding one’s financial and client-service expectations, all boil down to the particular funding source you use. Obviously, money is the first deciding factor when choosing a mortgage note buyer, but if the service you receive lacks effectiveness and efficiency, what’s the point of having your time wasted?
What Do Investors Look For When Buying Real Estate Notes?
All mortgage buyers have their own investment appetite, which is decided by the investor’s risk tolerance. The secondary mortgage market does not have a set note purchase criteria that all note investors follow.
Depending on if you are buying performing mortgage notes or non-performing mortgage notes will decide what a mortgage note buyer will consider when buying a real estate note for their portfolio.
On performing notes, most mortgage note buyers are interested in three major items:
On non-performing notes, most buyers look for:
Current Property (Market) Value
Foreclosure Procedures within Property State
Borrower’s Last Payment Received/Applied
This is something that all well-informed noteholders should know when selling a mortgage note. It all comes down to one major thing for a note buyer – RISK! This is something that a seller should keep in mind when they decide to sell mortgage loans. Risk of non-payment, risk of borrower default, risk, risk, risk. No matter who you decided to sell mortgage notes, any and all (smart) mortgage note buyers will first look to the asset’s down payment or equity in the real estate.
The equity in the collateral determines how sound that loan would be as an investment. The equity determines the loan’s security level. The higher the risk, the less the loan is worth to a note buyer. A good rule of thumb is: the less money one collects as a down payment, the less money the note is worth to a note buyer on the secondary market. The reason being a high loan-to-value (or LTV).
Just to clarify, a poor down payment is 0% to 9%, a decent down payment is 10% to 14%, a good down payment is 15% to 20%, a great down payment is 21%-30% and an excellent down payment is 31% or more.
The very next factor all note buyers look at is the borrower’s credit score (Equifax Score, Trans-Union Score, and Experian Score, also called a Tri-Merger).
Meanwhile, a poor credit score is 600 or lower, a decent score is 601 to 675, a good score is 676 to 720, a great score is 720 to 780 and an excellent score is 780 or higher.
Most note buyers will only go down to a 600 credit score whereas we will go as low as a 500 FICO Middle-Score. After the credit factor, the rest of the note’s calculation will really vary between the buyers.
Here at AX, our note purchase criteria will also included but not be limited to: the loan’s seasoning (payments received, payments owed), property location/ RE market trends, loan payment records, relationship between borrower and seller, loan’s performance, etc. To begin the note buying process online, click here for a free quote.
Selling a Note You Create has Never Been Easier
Thinking about owner-financing a property sale and selling a private mortgage note?
If you have not yet sold your property, and are you or your client are thinking about owner-financing the sale, you can maximize your cash payout once you create the mortgage note and sell it to a mortgage buyer.
This mortgage note buying process is very simple. As a future mortgage note holder, you can finance the property sale privately, without discounting the sales price (do not overprice) by creating a seller-financed promissory note. You can then sell the note to AX, via the secondary mortgage market, to achieve a painless exit strategy so you can move on with your financial goals.
It only takes a little research and some patience which will put you in a position to receive top dollar for your debt instrument when you sell your mortgage note. Keep in mind though, there are a number of moving parts to this type of transaction that must all be confirmed and maintained in order to ensure a smooth and favorable funding conclusion when selling your mortgage note.
AX has included a couple of major mortgage buying guidelines to follow, as well as some insight to the overall note investing sector (and its pitfalls).
Create Real Estate Notes
Many future note sellers should know what characteristics it takes to establish value when selling real estate notes to any/all mortgage note buyers, private or institutional. Knowing these loan characteristics would ensure that the note seller will be in best position to receive the most money possible for their privately held note (commercial mortgage note or residential mortgage note), when they go to sell the asset to a mortgage note investor.
The big question is: How do you know that your mortgage note will sell after you create it?
This is a question that we at AX hear quite a bit as it pertains to curious, diligent, and well-informed sellers as well as savvy note brokers. Below is some information on successfully creating a valuable mortgage note for resale to an investor.
Overview for Selling Mortgage Notes
When creating a privately held mortgage note, there are several things to keep in mind as a future seller. The very first piece of information any well-informed mortgage note investor will look at when reviewing a privately held real estate loan for purchase, is the down payment (or equity in the property/collateral).How much money did the borrower of the loan put down at the loan’s origination?This item will determine how secure the subject loan for sale would be as an investment. If the borrower only has 9.75% or less to put down, this will not allow you to maximize your note’s worth on the secondary market. The offers you would receive would be mediocre, at best. A decent down payment is 10% to 15%, a good down payment is 15% to 20%, a great down payment is 21% to 30% and an excellent down payment is 31% or more. A good rule of thumb is: The more money you collect from the borrower when you create the loan, the more money the loan is worth to a mortgage buyer when it is sold on the secondary note market. If the borrower has less than 10% to 15% down, the note would still sell (at least through us), although, the asset would succumb to a steeper discount (which varies depending on the total loan characteristics).
The higher the down payment, the higher the offers when it’s sold – plain and simple. The closer the property seller stays to 31% down or more, the more money you will receive when you go to sell the note.
Borrower Credit Rating
For any investor, the very next factor considered is the borrower’s credit scores (Equifax Score, Trans-Union Score and Experian Score or also called a Tri-Merger). Most note buyers use the middle-score of the borrower. So if the borrower’s credit scores are: 656, 634, 550 the note buyer will use the 634 score to price the note. Just to clarify, a poor credit score is 600 or lower, a decent/average score is 601 to 675, a good score is 676 to 720, a great score is 720 to 780 and an excellent score is 780 or higher. Most mortgage note buyers will only go down to a 600 credit score whereas we at AX will go as low as a 525 FICO Middle-Score. We are not suggesting that you try to get a borrower with a 525 credit middle score and call it a day. A smart note seller will be patient when searching for a borrower and try to find someone who has a credit score of at least 625 or higher. In order to maximize the note’s value when it is sold, it would be wise to obtain a borrower with a credit score over 720 FICO middle score. Now, you would probably ask why would a borrower with a credit score of 720 or higher opt in for owner-financing, instead of going directly to a bank. The answer is simple. Traditional banks do not only look at the borrower’s credit score when reviewing a mortgage loan for origination. The are other factors such as debt-to-income ratio (aka DTI), loan-to-value (aka LTV), etc. In order to secure a traditional bank loan from the big chain banks such as Wells Fargo, Chase, etc (or even small community banks), one would need a 29% to 31% DTI with at least a 70% LTV on residential loans and a 60% LTV on commercial loans.
Very few borrowers hit all the marks on the banks’ underwriting checklist, which is why you see in the media nowadays that even the most creditworthy borrowers are being shot down for financing by most banks. So, the suggestion here is, the higher the borrower credit score, the more your mortgage note is worth to an investor. Also, remember to verify the borrower’s credit score when you originate the loan via an attorney or real estate agent. Do not just go on the word of the borrower. A little diligence can go a long way.
When creating a seller carry-back mortgage loan with the intention of selling the loan to a mortgage note investor, one must keep several things in mind when deciding the loan’s terms and structure at the time of sale:
Stay away from interest-only structures and balloon payments of any kind (unless the seller does not mind a partial offer). Structuring a business loan as an interest-only (I/O) structure with a balloon payment is a very risky proposition in today’s market, because the borrower would need to be approved for a traditional loan in order to satisfy the balloon payment at maturity. To a buyer, the bulk of the return on investment (ROI) arises from the balloon payment being paid in full and on time. Very few, if any, traditional lending institutions will fund these types of requests, which leaves the note holder stuck with a devalued note.
A typical note buyer usually likes to be out of an investment within 5-10 years (depending on the note buyer’s risk tolerance and investment appetite). Creating a mortgage note with a 15, 20 or 30-year full amortization loan structure will likely succumb to a much steeper discount when being priced for a full-purchase. In order to maximize value when structuring a note, it is suggested to structure the loan as a fully amortized asset and keep the maturity date at 10 years or less. 5 to 7 years is a much safer bet for those sellers who require absolute maximum value. Anything above 10 years will take a bigger hit, due to a long wait for a return on investment (ROI).
Always keep the loan’s interest rate at least 3% to 7% higher than what the primary lending market is charging. This means that the loan’s interest rate must reflect the risk that the property seller is taking, by seller-financing the transaction in the first place. Keep the interest rate at least 9% to 15%, depending on the borrower’s credit score and down payment amount. If the borrower wants a 5% interest rate, let them go to a bank for the financing. Plus, a higher interest rate will protect the seller from a deeper discount when the note buyer figures their yield into the equation. The higher the interest rate, the more shelter the seller has from the note’s discount.
Include a Personal Guarantee (only if the borrower is a corporate entity)
A personal guarantee is included with a loan when the borrower is a corporate entity (LLC, etc) and not a private individual. If a real estate seller sells their property to a corporate entity and does not ask the borrower to agree to a personal guarantee, this could negatively affect the loan’s value on the secondary market by thousands, if not tens of thousands of dollars. It is that important! In the case of a loan default by a corporate borrower, the borrower can avoid repayment by dissolving the articles of organization or incorporation, depending on the entity’s business structure. Once the company is dissolved, in the eyes of the law, no one can legally be held accountable, thus the holder/seller is out their money.
There is absolutely no recourse. You would still get the property back in foreclosure, but that process would be dragged out for many months, if not many years in some states. It is a complete nightmare! A simple way to avoid this costly mistake when selling real estate notes to a corporate borrower, is to require and include a written personal guarantee by the borrower.
Payment Record Keeping
This is an item that is grossly over-looked by most sellers when creating a note for resale. A small part of the asset’s value comes from the cleanliness of the seller’s record-keeping abilities. It is of the utmost importance that the seller either keep and/or file cancelled checks (hard copies or electronically) or have access to bank statements proving that the payments we collected in a timely fashion.During the underwriting process of a real estate note transaction, any well-informed note buyer will request that the seller provides either cancelled checks, deposit slips (with bank stamp in it), or bank statements showing that the payments were made on time. If the borrower pays you in money orders for whatever reason (i.e. the borrower does not have a bank account, etc), it would be suggested to make copies of the money orders before cashing them.If the money orders are being deposited into bank account, it is not 100% necessary to make copies because the bank statements will show the deposits on file. Nevertheless, making copies is just an added security measure to ensure that the note seller’s record-keeping status is in order, which will in fact increase the value of the note. This also goes for down payment checks and record-keeping as well.
As every note buyer is different, most mortgage note buyers do like to see at least 1 to 6 months of seasoning before placing a bid on a mortgage loan for sale. This particular item does vary between note buyers. For the most part, many mortgage note buyers will most likely decline on a note that has not been seasoned at all (simultaneous closing, etc.). The seller may need to collect at least 3 payments before submitting the note for purchase. This way, there is some sort of visual indication of positive performance pertaining to the loan. We at AX will buy a residential mortgage asset as long as there was one payment collected on time. As far as commercial notes, AX requires that there be 3-6 timely payments collected depending on the down payment. The larger the down payment, the fewer payments we require to be collected by the seller prior to sale. We at AX have been involved in instances that allowed this item to be waived, due to a large down payment submitted by the borrower at origination (40% down or more). Out of all of the above listed items, loan seasoning is truly a matter of a note buyer’s investment preference. It is mandatory with us at AX to have a mortgage loan seasoned by at least 1-3 payments before we can buy it (depending on the down payment/equity).
Documents and Closing
If you’re passionate about selling real estate notes, we hope the information on this page proves useful. Executing the above mentioned suggestions will lay a strong foundation for engineering a high-value residential and/or commercial mortgage note that will successfully sell on the secondary market. Also, always use an attorney or a title company to draw up the closing documents (i.e. the note, the deed/mortgage/land contract depending on state, and so on). Remember, if the note is not recorded by the county in which the property resides, it is not a legal debt, which means it cannot be sold to a buyer. Enlisting an attorney or title company will avoid any problems with the asset’s status in the eyes of the law.
When it comes to structuring a mortgage note for resale, corners should never be cut. If they are, a seller should expect friction, delays, disappointment, and of course the possibility of getting stuck with the note. Properly informing yourself (or your seller) on structuring a mortgage note for resale will be the difference between selling the note or not.
Why Choose Us for Selling Mortgage Notes?
If you have sold your residential or commercial property and you or your client owner-financed the mortgage and you’re wondering how to sell mortgage notes, AX can offer a sound and painless exit strategy if you’re tired of acting as the bank.
AX is the fastest growing residential and commercial mortgage note buyer in the country today. We can fund the purchase of your mortgage note in as little as 15 business days. When it comes to selling a mortgage note on the secondary mortgage market, the chances of successfully reaching your financial goals and securing the highest payout become greatly increased when using the right direct mortgage note buyers and funding source. As one of the fastest-growing mortgage note buying companies, we pride ourselves on the absolute fastest turnaround to receiving cash for your mortgage note and the most aggressive offers on your asset.
If you have an existing promissory mortgage note that you want to sell now, simply contact us to get started today.