The Process To Sell A Note Created From Owner Financing

Since nearly every prospective looking to sell a note is doing so for the first time and probably the last time, I get a lot of questions about the note selling process. So nearly every note holder starts out with “I’m would like to sell my note and need to understand how the process works.”

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Our process is pretty straight forward and is as follows:

First step is to collect the information about the home’s sale and the resulting promissory note. The primary information we need is the sales price, down payment and terms of the note such as when was the first payment. (For sellers looking for simultaneous closing mortgage note buyers, we can help although you can’t sell a note with a simultaneous closing and stay away from RESPA laws, however if the note fits our note buying criteria we may can buy a note after 1 payment is made.)

Once we have this information, we work up a quote. If the seller accepts the quote, we send them a purchase agreement. Once signed, we will also need the security (Mortgage or Deed of Trust depending on the state.) and the note in order to pull credit. If credit is acceptable, we ask for proof of payments, usually only the last 12 payments. If this shows they have been paying on time, we then order an appraisal.

If the appraisal comes in satisfactorily, we order title and proof of homeowner’s insurance. Once title is clear, we usually close via overnight documents. Once we have the Originals and the final purchase agreement back, we order the sale recorded. Once we have confirmation of this from the Title company, we wire funds to the note seller and that’s it. I hope this was helpful.

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5 Critical Factors For Determining What A Private Mortgage Note Is Worth

As private mortgage note buyers, you would be surprised at home many private note holders call me and say, “I have a $100,000 note on a home I sold. Can you tell me how much it’s worth?” That’s like saying, I have a 2,000 square foot house for sale. How much is it worth? Like any financial instrument or asset, private mortgage note values can be all over the board. To help clear up much of the confusion, here are the 5 key drivers in determining the value of a note. These drivers are in no particular order.

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  1. The down payment/equity in the property – A nice down payment and/or chunk of equity really helps the value of a note as it lowers the perceived risk for a note buyer.
  2. The amount of seasoning on the note – As with equity, a long period of seasoning lowers the perceived risk for a mortgage note buyer, therefore increasing the note’s value.
  3. The credit of the borrower – Decent credit for the borrower not only lowers risk but it may even make or break whether note buyers will even consider purchasing the note.
  4. The amortization period – Long amortization periods make for bigger discounts as note buyers are discounting future cash flows. The further out incoming cash is, the larger the discount. It’s simply a function of time.
  5. The interest rate of the note – If you had 2 notes that are identical in every way except for the interest rate, the higher rate note (depending on the difference) will be more valuable. This is due to higher monthly payments that when discounted, result in a higher present value.

So when estimating the value of a private mortgage note, you need to take into consideration the above elements of the note. Better yet, if you’re creating or considering creating a note, be sure and use your knowledge of these drivers so as to create a much more valuable mortgage note. The result will be more money in your pocket, even if you don’t sell a note.

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4 Things To Never Do When Managing Your Mortgage Note

With the crash of the real estate market and complete pendulum swing in requirements to qualify for a mortgage, many home sellers are resorting to owner financing in order to move their property. Once the sale is completed, the seller now has in their possession a valuable financial asset. But managing an owner financed note is hardly a skill most home sellers possess or is taught in school or anywhere else today. As a private mortgage note buyer I get calls daily from note sellers wanting to sell my note that haven’t managed their asset as well as they should. Some of the mistakes can make a note un-sellable, or at least for a discount they can accept. Below are the 4 biggest mistakes I see on a daily basis.

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  1. Not monitoring whether the borrower is current on their property taxes – In a worse case scenario, this mistake could result in a total loss if the home were foreclosed on my the local municipality and sold off before the note holder even knew it.
  2. Not insuring that the buyer is current on their homeowner’s insurance as well as has sufficient coverage – If the borrower let their insurance coverage lapse and had a fire, the note holder could again end up with a worthless note. Note holders should not only monitor the borrowers insurance coverage but should be sure they are on the policy as the mortgagee.
  3. Not physically monitoring the property – Many property sellers no longer reside in the city the property they sold and owner financed or they live across town. As a result, they rarely if ever drive by the home which is the asset supporting the note they hold. What can and has happened on many occasions is that the borrower may have moved out and is renting the property out to a friend or family member who has a lot less incentive to maintain the property. This could also cause problems if a major insurance claim were made since the property is no longer owner occupied, requiring a different insurance policy.
  4. Allowing the borrower to pay their mortgage in cash each month – If the note holder never needs to sell their note, this may not be a big deal. However, if the note holder ever needs to sell their note, they will not have proof of the servicing of the note. This makes a note worth much less and giving the borrower a receipt will not suffice.

There you have it, four mistakes to avoid in order to a) protect the value of a private mortgage note and b) make the note worth more money if you ever need to sell your note.

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3 Things You Must Not Do When Using Seller Financing To Sell A Home

As with all private mortgage buyers, I see lots of private mortgage notes. Sadly, many are worth far less than they could be because of mistakes property sellers make when creating the note when seller financing. At the time of the sale, the only thing most property sellers can think about is just to get rid of the property. And who can blame them? But with just a little bit more work, the resulting private mortgage note could be worth a lot more if you ever need to sell a note. Here are 3 very common owner financing mistakes to avoid.

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  1. Not pulling credit – Sellers who don’t pull credit are just asking for trouble down the road. I’m not even saying you shouldn’t sell to someone with blemishes on their credit, particularly if the problems occurred 2 or 3 years back. If you ever want to sell the note, the note buyer will pull credit. If your buyer has terrible credit, you probably won’t be able to sell the note at all or at best at a much larger discount. Also, if you don’t get social security numbers in order to pull credit at the time of the sale, there is a good chance that the buyers won’t give them to you later as they have little to gain from this.
  2. Allowing a 30 year amortization with no balloon – Unless you only want the income and plan to never sell the note, you could do this but who knows what might happen 10, 20 or 30 years in the future. Even if this were the case, you could do a 30-year amortization with a 5 to 7 year balloon and when the balloon comes due, extend the balloon period for 5 more years. This way you have options otherwise, if you ever need to sell the note you will get a much better price as a dollar is worth a lot more in 5 years than 30 years.
  3. Charging a low interest rate – Property sellers offering seller financing should realize that they are in the driver’s seat when it comes to the terms of the resulting mortgage note. They should not be charging an interest rate that is at market (traditional mortgage rates) or worse, below market. Charge a premium over market of 2 to 4 percent. If you ever need to sell the note, you’ll get a much better price.

There you have it, 3 mistakes to avoid when offering owner financing in order to sell your home or other real estate.

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The Biggest Mistake I See Private Mortgage Note Holders Do

I get a lot of calls from private mortgage note sellers with an almost limitless number of notes to sell. And while there are a number of elements of a private mortgage note that can make it difficult to impossible to sell a real estate note, there are a few that stand out in my mind as a note buyer. I thought I would go through these so that 1) note sellers will be aware of the added difficulty they will face when trying to get good money when selling a note and 2) property sellers considering owner financing will avoid these mistakes. So her they are:

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1) Allowing your buyer or mortgagor to pay in cash. It doesn’t matter if you give them a receipt. Not that you would, but receipts can be created out of thin air. Require (cover this up front, maybe even include this requirement in the mortgage note) your borrowers to pay by check. If they don’t have a checking account, require them to get a money order from the post office. Keep a log as well as copies of the checks or money orders. better yet, have a third party handle their payments.

2) Setting a very low interest rate. A very low (below 7% currently) interest rate will really hurt the price of the note mortgage note buyers will pay due to the way note discounts are calculated. The higher the future income stream (payments), the better the price.

3) Setting a term period too long. While there is nothing wrong with amortizing the mortgage over 30 years, (the longer amortization period will help you get a higher interest rate) set a balloon period of 5 to 10 years. If you don’t then a huge number of payments will be many years out and therefore really hurting the price of your private mortgage note.

4) Allowing the seller to put no money down. This increases the risk for a mortgage note buyer as the buyer can just walk away with no cost other than a hit to their credit which may already be damaged. Also, if you sell the property at below what you believe is market value, a note buyer may just not agree as many people in the real estate business, believe the price you accepted is the market value.

So there you have it, 4 mistakes that private note creators and holders make that significantly impact the price a promissory note buyer will pay for it.

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