A Guide To Selling
Mortgage Notes & Land Contracts
You Know Your Note Could Be Converted To A
mortgage notes are created through the owner financed sale of
real estate. If you sold – or are considering the sale of – property
with owner financing, you left the closing, not with a check, but with
a pile of paper, including a promise from your buyer to pay you in
installments over a period of years. That promise might be called a
private mortgage note, a deed of trust, land contract, or contract for
deed, but even though there are important differences among them, they
all mean waiting – a very long time – for your money.
Waiting may not have been a problem at the time you sold. In fact,
owning a private mortgage note can give you a steady stream of monthly
payments at a reasonable interest rate. But now you need a chunk of
cash, not a trickle of payments.
Your note is a valuable financial instrument
and, like stocks and bonds, has a cash value. In fact, depending on
your specific needs, it can be sold in
increments, netting you more cash – more quickly –- than the note's
current principal balance.
The cash flow industry has note
for just about any
note that exists, but its largest category by far is real estate notes.
Although there is no accurate way to measure
their numbers or value, industry experts agree that privately-held real
estate notes number in the millions with a total value in the tens of
billions of dollars. And because they are backed by real estate,
mortgage notes remain very attractive to investors, both private and
public, who together have untold billions to buy them at every
Why is this important to
In a word, "liquidity." While it is true that you can't walk into a
bank or call a brokerage house to redeem your private mortgage note for
cash, you can have a lump sum payment in your hands in a matter of a
few short weeks. With so much available money and such a huge appetite
for quality real estate notes, mortgage note buyers
have become the
industry's creative real estate financing experts, buying mortgage
notes in a variety of flexible and innovative ways. In fact, a
professional contract buyer or note broker can work with notes:
- At any interest rate
- For any term
- With no payment history ("seasoning")
- Up to 100 percent financing
- Simultaneous with the sale of the property
- Without checking the payor's credit
- Currently in arrears or even in default!
To accommodate just about any seller, note buyers
have programs for:
- Whole note (full) purchases
- A partial note purchase for a specific lump sum payment
- A split disbursement partial, allowing you to sell a
portion of each
- The purchase of a balloon payment, either: full or partial
And programs to increase the total value of your investment, including:
- 100 percent payout programs
- Multi-stage payouts
- Front loaded partials
- Reverse partials
If your contract buyer cannot offer you what you need, a note broker
may be your answer. Professional note brokers are known as the cash
flow industry's creative real estate financing gurus because they can
freely package the products of several different investors to craft
unique solutions. You might even find a note broker who works with a
private mortgage investor that offers exactly what you want.
How Do Investors Determine Their Value?
You may believe that your note can be sold for a lump
sum payment equal to its current principal balance. With the help of a
note broker, you may be able to find a private mortgage investor
willing to pay you the face ("par") value of your note, but par value
purchases are rare.
Remember that there are techniques note buyers
can use to
total amount you receive for your note – even more
than the current
principal value – if you can be flexible.
Most private and institutional investors buying mortgage notes
professionally value notes according to the long term "yield," or the
return they require on each dollar invested. Note buyers
call this the
"Time Value of Money" which means my dollar today is worth more than
your dollar tomorrow. To achieve its long-term-yield, the investor will
discount the face value of a note, so your contract buyer or note
broker will most likely be offering you something less than your note's
current principal amount for a whole purchase.
Mortgage buyers determine
the note yield and value according to the:
- Security for the note (the property characteristics and
- Note's current principal relative to the property
To Value Ratio, or LTV)
- Note's interest rate
- Length (term) of the note
- Payment schedule
- Credit worthiness of the payor
- Payor’s equity in the property
In addition, the investor may adjust the yield to account for other
terms of the note that may affect its value. For example, if you
offered your buyer an adjustable rate, interest-only payments, or a
discount for paying the note early, most mortgage note buyers
adjust their required yield – and your discount – to compensate.
The value of your note is
determined by when it's created.
Even if you don't plan on selling it now, things can change. To cover
yourself, consult a professional contract buyer or note broker before
you go to settlement with your buyer to structure a note with the
highest possible value to an investor.
Selling Your Private Mortgage Note: Step-By-Step
- Gather all the facts about your note and property.
- Find a professional contract buyer, note broker, or private
investor you can work with.
- Get a written purchase quotation for your private mortgage
quote will normally be a "net" price to you after deducting expenses
and will be conditioned on your providing the required documents and
the investor's review ("due diligence") of all the details.
- Your contract buyer or note broker will package your
submit it for processing. Expect this to take at least several weeks
for a normal private mortgage note sale.
- Assuming all the details pass the due diligence phase, you
contacted to arrange for closing (many times, closing is done by mail).
- You receive your cash!
The cash flow industry has made the buying and selling of mortgage
notes a fairly straightforward process. A little preparation and care
choosing a professional contract buyer or note broker – one who puts
your needs first, rather than his own – will go far in ensuring a
smooth and pain-free transaction.