Written by Jeffrey R. Armstrong – President/Owner of Armstrong Capital
Your favorite Master Note Buyer – Straightforward, Honest, Fair…
Purchase of private mortgage notes
The term “private mortgage notes” (aka seller financed notes, purchase money mortgage, includes any mortgage notes or deeds of trust held by a private individual as a Seller Carryback note. Seller Carryback notes are created when the seller of a property agrees to carry back the financing for the buyer of the property to facilitate the sale of that property in the form of a promissory note. That note is secured to the property with a mortgage or deed of trust in which the buyer of the property is the mortgagor (individual making the payments) and the seller of the property is the mortgagee (individual receiving the payments).
There are individual and corporate investors who purchase these notes when the holder of the note wants to convert the note to a lump sum of cash. The notes are never purchased for the face value of the note. Note Buyers take into consideration the time value of the money being offered for the note and calculate the return they would like to earn on that money. The purchase price offered will be lower than the face value of the note based on those two factors. All elements of the note, such as interest rate, term, any balloon payment included, and monthly payment amounts remain the same. The payor of those payments has no say in the transaction and does not have to agree to the sale of the note. He or she will be notified of the sale after it is finalized and will be told to whom to send payments following the sale.
High quality notes may be sellable as soon as they are created after the first payment has been received, but most purchasers of notes require some seasoning as evidence that the payor intends to make the payments on time. The payor’s credit history plays a crucial role not only in the viability of the note but also the purchase price offered. Note Buyers are likely to offer more for quality notes than they would for notes where the payor has a less than stellar credit history. It is always assumed that if the payer had a stellar credit history, he would have been able to qualify for and receive conventional financing through more traditional avenues.
Frequently Asked Questions:
If I can’t sell the note at face value, how much can I get for it?
Many variables including the amount of seasoning the note has, the interest rate on the note, the length of time the note covers, the amount of each payment, and the creditworthiness of the payor will affect the amount you can get for your note. Ask your note buyer to give you at least three options for your note and consider a partial sale as an alternative to get the most value.
How long does it take to make the purchase?
Generally, it takes at least three to four weeks to close on a real estate note after all of the copies of documents and initial information are received. The note buyer has some due diligence to do and will order a title report and a drive by appraisal of the property, which will affect the amount of time. What they learn in due diligence could also affect the value of the note and purchase amount you will receive.
How will I get my money?
Most buyers will wire your payment directly to you or if you prefer you can designate an escrow company/title agency/real estate attorney to receive it (at your expense), which will give it to you.
Who pays the closing costs?
Generally most Note Buyers will give you, the note holder, a NET price and cover all NORMAL costs of the closing and transfer. Depending upon the Note Buyer they may require the note holder pay the closing costs and this is normally designated up front.
Is there a maximum or minimum size note that buyers will purchase?
It depends on the buyer. Some buyers aren’t interested in note less than $10,000 or larger than $300,000. Other buyers specialize in larger notes and smaller notes across the country such as short term notes on mobile homes and land. A note broker will be able to find the buyers that would be interested in your note.
Is the transaction confidential?
If the buyer can’t promise you confidentiality, don’t do the deal. Again, a real estate note broker should find you buyers who understand the importance of confidentiality.
How can I make sure that I’m getting a fair price?
First, ask for a thorough explanation of the basis for the offer. You should try to get more than one offer. If buyers know that they are in competition or that you are looking for the best offer and not just any offer, you may get a better price, depending on the quality of your note. But generally most note buyers will be all in the same range of pricing and most note holders work with a note broker or note buyer that they trust.