Frequently Asked Questions About Mortgage Note Sells Process
A real estate receivable is a document (or documents) secured by real estate that obligates one individual or company to make payment(s) to another individual or company. These receivables are created when a piece of real estate, such as a house, is sold. The purchaser gives the seller a cash down payment and the balance is paid to the seller in periodic, usually monthly, installments. Therefore, payments are made from the property purchaser (Payor) to the property seller (Payee).In these transactions, the property seller is simply deferring to the future a portion of the purchase price not paid at closing. Historically this is called seller-financing or owner-financing.
The legal documents that accomplish these tasks generally take one of three different forms: Promissory Note & Deed of Trust, Promissory Note & Mortgage, or Real Estate Contract (aka Contract For Deed, Land Sales Contract). The generic term for each of these is a Real Estate Receivable. For convenience, we refer to all real estate receivables as “notes.” The payments a property seller will receive from these notes are an asset and like any other asset can be sold for a lump sum of cash.
There are perhaps as many reasons people sell their notes as there are ways to spend money. We always ask note sellers why they wish to sell their note. The most frequent responses we get are: 1. To eliminate the risk and responsibility in holding the note; 2. To achieve liquidity; 3. To take advantage of other investment opportunities; 4. To pay off debts; and, 5. To make specific purchases. Often people never wanted to carry back a note in the first place but had to in order to sell their property. Other situations, such as notes provided as equity settlements in divorce cases, inherited notes, to name just two, often result in the current note holder owning a note they never wanted. Often these people are happy to receive the current value of their note in cash and move on with their lives.
Other reasons may include;
*Retirement *Taxes *Expensive Medical Care *Vacation *College Tuition *Unexpected Financial Changes *Accounting headaches, IRS regulations, paperwork hassles and the list goes on…
The most obvious question people ask us is “What is my note worth”? Or, “How much money can I get for my note”? Unfortunately the answer to these questions are not as easy as they would like. Basically, whenever future payments are sold for cash today the current balance is sold at a discount. There are two reasons for this: 1. The balance of the loan is paid back to the payee over time–and time erodes the value of money; and, 2. The stated interest rate on seller-financed notes is not high enough to induce investors to purchase these loans. Therefore, to increase the yield to investors, you must sell the cash flow at a rate of return greater than the note rate. You do that by selling the note at a discount from its current principal balance. This is true for private note holders, Arow Asset Management, or even for the government.
Most investors want to earn a 6-12% annual return over the life of a note and the longer the note, the deeper the discount will be in order to earn that return every year. That’s why a 10 year note is worth more than a 30 year note. Quality is also a factor. If the note is low risk, the investor will be willing to buy it at a lower yield and thus pay more cash for it today. Notes with a high level of risk will merit a higher yield and will be discounted more.
The amount of cash a note can be sold for depends on the current economic environment, the terms of the note (payment amount, interest rate, length of payback, etc.), and the probability that the note holder will lose his/her money (degree of risk). The prevailing economic environment influences the yield or rate of return an investor requires when purchasing a note. In general, the better the economy, the lower the cost of funds for the investor, and, therefore, the lower the yield required on the investment.
Currently, the economic environment is somewhat stagnant; however, interest rates remain at historic lows! Today’s low interest rate environment means more cash now for note sellers than ever before–and perhaps, more than will ever be paid in the future. We must examine the terms of the note and the degree of risk individually for each note offered for our purchase. Many people would like us to quote a fixed percentage of the remaining balance on their note. This is not possible due to the large variability inherent in these two components. However, in most cases, we can evaluate all three of the above components and make a cash offer for your note while still on the initial telephone conversation.
Yes, in fact this is very common. It is referred to as a “Partial Purchase” and involves selling only a certain number of the remaining payments on your note. At Arrow Asset Management, we can purchase any number of the remaining payments in almost any manner you can think of. For example, let’s say you have a note with a balance of $80,000 payable in 240 monthly installments. If you needed just $20,000 now for whatever reason, we would calculate how many payments we would need to purchase to provide you with that specific amount of cash. Precisely which payments we purchase depends on your personal financial situation. Here’s a few of the options we could look at for you:
We could buy (Numbers are for illustration only):
* A certain number of the beginning payments on the note. For example, we might purchase the first 60 payments and you would receive the final 180 payments.
* A certain percentage of each of the remaining 240 payments on the note. For example, we might purchase 50% of each of the 240 payments. You also would receive 50% of each of the 240 payments.
Remember, the above options will provide you with the $20,000 needed today. The type of partial purchase chosen will depend entirely on your unique financial situation. In other words, you may choose the first option if you need $20,000 today and want or need to have a future monthly cash flow beginning in 5 years; and you might choose the last option if you need $20,000 today and also want or need the monthly 50% payment for the next 20 years.
There are many other ways we can structure the Partial Purchase for you. Our goal is to get you the specific amount of cash you need NOW while also addressing your financial concerns of the future. A real estate note is a remarkable asset when you can intelligently sell your payments to an investor able to provide you with such a rich variety of possibilities.
We have purchased notes in as little as one day; and it has taken over a year to purchase others. On average, it takes two to four weeks. If the sale of your property and the creation of the note was “typical” then you should have your money within two to four weeks.
We will take an assignment of the security instrument (Deed of Trust or Mortgage) and receive an endorsement of the promissory note. These are the final steps in selling your note, however, before we get to this point we have to do our due diligence. That is, we need to verify all aspects of the transaction. You need not be concerned with not knowing what to do since we do all of the work– from verifying all aspects of the deal to preparing and having recorded all of the necessary documents to make the change.
A note appraisal reflects the current market value of your payments similar to what a real estate appraisal provides for real property. It shows what your future payments are worth in cash dollars today and is sometimes referred to as a “note analysis” or “quote”.
We recommend you have your note evaluated once a year as pricing may change based on market conditions.
Many of the items that affect the value of your note were determined at the time the property was sold. However, there are three things that you can do now to make your note more valuable:
- Keep good records and copies of the payments received,
- Obtain a copy of the property insurance policy from the buyer each year; and
- Verify the property taxes are paid when they come due (usually twice a year).
This will help maintain the value of your important asset and avoid any unpleasant surprises.
The value of a note is affected by the down payment, interest rate, payment amount, and term as well as the buyer’s credit rating and payment history. The type, condition, and value of the property also impact the value of your note.
The time value of money, which makes payments due now more valuable than payments due in 20 to 30 years, also plays a role in the evaluation process. Generally, due to inflation, money in your pocket today is worth more now than later. All of these elements will be taken into consideration in determining the current value of your note.
The first step is to obtain a quote using our online form or by calling us at (832 ) 310-6773. We also request copies of the documents relating to your transaction:
- Note and Mortgage (Deed of Trust or Contract)
- Closing statement
- Buyer information
- Pay history and current balance
- Previous title insurance policy
- Current hazard insurance policy
We will then provide you an offer subject to the standard title, appraisal, and buyer’s credit review. Once under contract, you will receive your cash as soon as all of the documentation can be obtained. This typically takes as little as 10-15 working days.
The purchase price is paid in guaranteed funds (cashier’s check or wire transfer) upon receipt of the final transfer package and original documents.
We are happy to wire funds to the title company so you may exchange your original documents for the proceeds, assuring the safe and secure transfer of your valuable asset.
The Payor experiences no change in the way the payments are structured. The only change will be the address and to whom where the payments are mailed. All of other proper Federal compliances and paperwork are handled for you (i.e. Consumer Protection Act (the Dodd-Frank Act), Section 404 Notice requirements TILA Section 131(g) and § 1026.39 of Regulation Z currently require the new owner or assignee of a mortgage loan to notify the consumer of the sale or transfer of a mortgage loan no later than 30 days after the date on which the new owner/assignee acquired the loan.)
In simple terms, allow us to handle all the paperwork, documents, and Law compliance – while you remain Worry Free.
We don’t offer tax advice and you’ll need to confirm with your CPA. We’ve found that in most cases, if a seller claimed the installment sale tax method back when they created the note and if they are selling it now for more than their basis, then they will need to pay tax on any capital gains. Since a note could also be sold at a capital loss, it may actually reduce taxes owed come April 15th. Make sure you chat with your tax professional to find out exactly how selling your note will impact your taxes.
Yes. We will be happy to help you structure your new note to get the most value. Give us a call and we can chat through your deal together. 832.310.6773.
When we buy a partial, we will set it up with a third party servicing company to monitor the payments and track how much of the note both you and the investor own. If the note defaults and the property is resold, the investor is entitled to their remaining portion first and you get the rest.
We’ve bought several thousand partials and the best thing is for you to speak with one of our note specialists who will share our partial agreement with you. You can even take it and have your attorney review it if desired.
When you sell a partial, you keep part of your note. The most common partial is where you sell a certain number of the upcoming payments. Let’s say you you a 10 year note and decide to sell the next 5 years of payments and keep the back 5 years. The other method is a split payment partial where you sell a portion of the monthly payment and keep the rest. Partials are a great way to free up the exact amount of cash you need without selling the whole note at a big discount. To learn more about them, review the explanations on our “Examples” page.
If I sell my note, what happens in the event of an early payoff (your Buyer sells or refinance the property)? You receive the balance of your note minus a small payoff on the Partial without any further discount.
YES! You’ve sold your property and taken back a note and mortgage from the Buyer. Now the Buyer is making payments to you. Now you want or need cash however you don’t want to give up your mortgage or sell the whole mortgage at a steep discount.
A Partial mortgage note purchase may be your best solution; getting you cash now while accommodating your desire to keep the mortgage. Once we’re paid, the mortgage is returned to you and all associated benefits are again yours.
A Partial purchase of your note is the combination of the two greatest multipliers of wealth known to man.
* The Miracle of Compound Interest
* The Time Value of Money
When you sell part of your note (Example: the next 10 years payments on a 30 year note) you continue to earn interest on the remaining portion of the note you did not sell.
Every month your Payor pays interest on the entire balance of the mortgage note, the portion you sold PLUS the portion you did not sell. You get cash now for the portion of the mortgage note you sold plus you continue to earn interest on the remaining portion of your note you did not sell…
That’s a win-win situation, have your cake and eat it too!
With our flexible purchase options we may be able to show you how you can receive more than 100% for your mortgage note.
