Sell your note
If you were the seller in an ‘owner will carry’ real estate transaction, or received a mortgage note as part of an inheritance, you may be wondering if you can sell your note and, if so, what is it worth? Whether you want to pay off existing debts, invest in a new opportunity, or even take a vacation, selling your note may be a good option. We have created this page as a resource to help educate you on what to expect when selling your note.
What is a note?
A private mortgage note, or deed of trust note in some states, is a promissory note that is created when a piece of real estate is seller financed, meaning the seller extends credit to the buyer for the difference between the sales price and the cash down payment. A note is the legal document that obligates the borrower to repay a loan at a stated interest rate during a specified period of time to the lender. The lender in this case is a private party that was willing to extend credit to their buyer in lieu of accepting all cash at closing. The note will state details such as the loan amount, interest rate, due dates, late charges and other loan terms. The party that holds the note has become the lender and is often referred to as the "note holder".
How to sell a note?
Wondering if it’s possible to get a lump sum payment for the seller financed mortgage note you are carrying? Ultimately, you need to speak with a note buyer, which is an investor or bank that specializes in buying notes, to receive a fair market valuation of your note. McKinley has been buying performing real estate notes since 1989.
Below is a quick list of the best ways to prepare to get the highest cash offer for your note:
Get your paperwork in order
Payment history: One of the most important pieces of paperwork you will need is verification of the note's payment history. Typically, a documented six month payment history is required. Where can you get this information? If you use a contract servicer, they will be able to pull a pay history report for you. If you have foregone a contract servicer, you may supply bank statements or copies of checks showing that you received payments from your payor.
A note buyer will not purchase your note without first verifying you posses your original documents. It is better to provide a copy of the documents up front to speed up the sales process. Your original note, deed of trust or mortgage, and closing statement will be needed.
If you are missing your original note, our closing team can work with the county your note was created in to create a lost note affidavit. However, this could add additional time to your closing process.
Hazard Insurance Documents:
If the property securing your note is improved, your payor should have a current hazard insurance policy. Here are several items to look for to ensure you are properly protected. The policy should: - List you as the loss payee - Have the correct property address - Have not expired - Cover the entire value of the property - Cover fire and other hazards - Have liability coverage if the property is a rental.
If you hold your note in a Limited Liability Company or Corporation, you will need to provide your company’s current organizational documents and operating agreement. If the note is in a Trust or if you have Power of Attorney on behalf of the note holder, be ready to provide documentation verifying your ability to sell the note.
Title Insurance Policy:
One way to speed up the closing process is to provide a copy of your original title insurance policy. Most buyers will only buy 1st position notes, though exceptions can happen. Sending in a copy of your original policy will speed up the closing and help the underwriters verify up front that your note is adequately protected.
You will need your payor’s contact data and property information readily available. Some items a buyer will want to know are: County tax number, size of the lot and improvements, age of the property, rental income amounts (if applicable), legal description etc. The more information you can provide up front, the faster the deal will close.
Receive a Quote
Every note buyer is going to need to see the terms and conditions of the note before they can provide you with an offer. Most buyers request you fill out a form or talk to an specialist to get the process started. Once the note buyer has the needed information they should be able to respond fairly quickly with an offer. Generally, there are two types of offers you may receive:
You receive a cash offer to buy your full note at a discount. The amount of the discount is based on perceived risk of note and the terms at which it is written. The lower the risk, the less of a discount. Likewise, the shorter the term and higher the interest rate, the more cash you will receive today.
You sell part of the note and keep the rest. The portion of the balance you keep is referred to as the backend. The benefit of selling a partial is that you get cash today, and you still retain cash flow from the backend of the note once the investor has received their payments. Partials are a great way to free up some cash without taking a big discount selling your whole note.
There are two types of partial payment offers that a note buyer will provide.
- A front-end partial in which you sell the note's payments for a specific period of time. After the investor has received the portion they bought, the note reverts back to you and you begin receiving payments again.
- A split payment partial is where you sell a portion of the monthly note payment. The benefit of the split payment partial is that you get a lump sum of cash today and continue to receive a portion of the monthly note payments.
Partials will be serviced by a third-party servicing company to ensure all parties are protected and that the note properly reverts back to you at the right time.
Note Buyer Conducts due diligence
The buyer will order a drive-by Brokers Opinion of Value (BOV) on the property that the note is secured by in order to obtain a current property value. For commercial notes with a balance over $500,000, a commercial appraisal may be requested.
Several recent laws, including Dodd Frank, have put restrictions on seller financing. During underwriting, the file will be reviewed to ensure the original sale didn’t violate any rules that would put the new investor at risk.
Proof of Rents:
If the property is income-producing and you may be requested to share financial information verifying the income the building generated while you owned it.
Under the Fair Credit Reporting Act, a buyer has the ability to run a soft pull credit check on your payor. This check won’t affect their credit but your payor’s credit score will impact how much a buyer is willing to pay for your note.
The buyer will check with the county where the property is located to confirm that property taxes are up to date. If they aren’t, either you or your payor will need to bring them current before closing.
In some states, unpaid Homeowners Association (HOA) dues can become a lien that takes priority over your note. If the property securing your note is in an HOA, any unpaid fees will need to be brought current before closing.
A preliminary title report will be ordered by a title company to ensure that their are no other liens or encumbrances show on the title of the property that would increase the risk for the investor.
While most of the time, the pay history on the note is sufficient, there are times when the buyer will request additional information from the payor like employment or long-term plans for the property. If the underwriters do need to contact your payor, they will notify you first before doing so.
There are times when the note and deed of trust or mortgage securing your property were accidentally set up incorrectly and if kept as-is, would put all parties at risk. If an underwriter finds that to be the case, they will work with you and your payor to correct those issues before the final sale occurs.
Generally, a closing will take 30-45 days from the time you accept the note buyers offer. The factors that impact the closing are how quickly you can provide all the requested documentation, the location of the property, the quality of your note, the turnaround time from the realtor and title company and whether or not all insurance, taxes, payments and fees are paid current. If you need to rush your closing, let the note buyer know up front and they will help you expedite the process.
Your note sale will be closed through a closing attorney or a third party escrow firm in the county where the property is located. Funds will be wired into escrow by the investor and you will receive a wire once the assignments have been recorded.
After final recording and funding, the note will be set up with a third-party servicing company and your payor will receive a letter in the mail directing them on where to send their payments.