If you are in possession of a mortgage note or if you carry paper on a seller financed property, the decision will come up sooner or later: should you sell your mortgage note?
If you have seller financed a property, you are unlikely to hold onto the note for the full 15-30 years it takes the loan to fully mature. But how do you know when it is the right time to sell?
The decision to sell to mortgage note buyers is going to be influenced by two types of factors. Internal, or factors having to do with your situation and needs, and External, or having to do with the note-buying market and the real estate market in general.
By keeping an eye on both these factors, you will be able to make the decision to sell confidently and will be able to get the best offer possible for your mortgage note.
Let’s unpack these factors.
Sometimes life goes in an unexpected direction. When that happens, you may find yourself in need of immediate cash payout or desire to drop some of your extra obligations.
Whatever the reason, occasionally the decision to sell your mortgage note will have nothing to do with the favorability of the market, but rather your own needs as a seller.
What sorts of circumstances might make it necessary, or at least tempting, to sell your mortgage note?
Alternative Investment Opportunities
Carrying paper on a property is an investment, and needs to be compared against other opportunities on a regular basis to ensure that it is still serving your needs. Investments aren’t static. A wise investor doesn’t simply place their money in one spot and hope for the best return. Instead, as you know, growing your wealth is often a matter of making your money work hard for you, even if it means changing up your investment strategy now and again.
If a better investment opportunity turns up, getting a cash settlement for your mortgage note will enable you to act on that opportunity.
What you are looking at here is typically interest rates. If you can invest in property or some other venture at a higher interest rate than you are currently getting for your note, it may be worthwhile to put your investment dollars there.
Anxiety or Uncertainty of Continued Payments
The one downside to a seller-financed mortgage is that the return on your investment rests solely in the hands of another human being. Even if your payer has always made payments on time, it can be unsettling to know that if they stopped paying, your investment would stop returning.
Whether your payor is making consistent payments or not, the uncertainty of this kind of investment may be something you are simply not wanting to deal with, especially if you are heading into retirement.
Selling real estate notes allows you to get a return on your investment without the continued worry of whether or not the note is going to continue performing.
Desiring a Lump Sum Over Payments
This last one goes hand in hand with the last and is largely a matter of personal preference. You may have simply come to a point where you want a lump sum for your note, rather than continuing with monthly payments.
This could be because of a desire to pay down other debt, or to invest elsewhere, or even to finance a long-overdue vacation. Regardless of what you want to use the money for, desiring a lump sum rather than continued payments may be a good enough reason to sell your mortgage note to a private note buyer.
This category isn’t nearly as broad. The greatest two external factors in the decision to sell your note are the real estate and note market and the laws governing mortgage note transactions.
The residential market has made an incredible recovery, which means more people are buying homes and notes tend to be performing well.
All this comes together to mean that, all things being equal, sellers of mortgage notes can expect to be offered an excellent offer for their notes, especially by using a company with a history of forming good exit strategies for clients.
The story in the commercial loan is quite different, with the commercial market still trailing the residential in terms of recovery. That said, even if you have a commercial note, private note buyers are still willing to buy mortgage notes that are proving troublesome for their current owners.
We are in an interesting time just now, with a tumultuous political and legislative climate, so watch Congress.
While it doesn’t appear to be the top priority just at the moment, a major change could be in store vis a vis the Dodd-Frank Act and other financial legislation.
If Dodd-Frank is repeal or changed, it could make seller financing a good deal easier, which may affect your decision to continue to carry paper or to sell your note to a private buyer. We talked about the implications of this potential change in the note-buying market a few weeks back.
So Should You Sell Your Mortgage Note?
There is no magical right answer here. It’s important to take stock of your current situation in relation to the market and determine what the best possible course of action will be.
That said, it never hurts to see what your capital gains liability could be if you did opt to sell your mortgage note. It’s easy to get a free quote from one of our note professionals.