NoteSolutions.us

Introduction

By Robert Duplicki      February 15, 2024

People seem to have a lot of questions about private mortgage note buyers. Perhaps you have one or two. Depending on your background and what you are looking for, it will help you to follow along in the order presented. But feel free to jump around as the answers work together but also stand on their own.

Table Of Contents

1. What Is A Private Mortgage Note?

   A private mortgage note is a combination of a promissory note, and a security instrument such as a mortgage or deed of trust. A distinguishing factor is that private mortgage notes are funded by the sellers of property or a private lender, which could be friends or family. This funding arrangement can be applied to both residential and commercial property. Private mortgage notes are commonly referred to as real estate notes.

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2. What Is A Mortgage Note Buyer?

   A mortgage note buyer is an individual or an entity that purchases all or some of the remaining payments from a private mortgage note, paying a lump some of cash for a series of payments. Depending on the terminology you are using, mortgage note buyers also buy promissory notes and loan notes secured by real estate. All these terms fall under the category real estate notes. But keep in mind that promissory notes are used in other transactions than those secured by real estate.

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3. What Is The Difference Between A Mortgage Note And A Promissory Note?

   A promissory note is a promise to pay. You can call it an IOU. So it can be used informally, like a deal written on a napkin. In the context of this article and related business transactions, a promissory note is a legal document which can be used on its own, or in conjunction with other documents.

   If you are thinking in terms of real estate, the promissory note is used in conjunction with a mortgage or a deed of trust. Another example where a promissory note is used is in selling a business. Then the promissory note is used in conjunction with an asset purchase agreement, a chattel security agreement and a UCC-1 financing statement.

   A mortgage note by comparison is used only with mortgages and real estate. The mortgage note is the combination of the promissory note and the mortgage or deed of trust. In common language these terms are often used in ways that a person is familiar with, for example based on what is customary in their part of the country.

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4. Why Do People Sell Mortgage Notes?

   People sell mortgage notes to get money to solve problems, or to take advantage of opportunities. These people are already receiving payments for their notes. Monthly payments are most common. But by selling their notes they will receive a lump sum of cash. So they are accelerating the process. They will receive more money sooner, for which they may have an immediate use.

   So people sell mortgage notes for a larger sum of money to pay for unexpected bills, or larger bills than they expected, but don't have the money available that they had hoped for. People also sell mortgage notes to pay for exciting vacations, wonderful gifts and beautiful property renovations.

   On the other hand, some note holders didn't want their notes in the first place. Perhaps they seller financed their home, because of urgency to get the deal done. Other note holders may find that they no longer want the responsibility of collecting payments and the risk of default and getting the property back. Still other people didn't know they could sell their note when the note was first created. Eventually they learned about the possiblity that they could sell their note, and took advantage of it.

   If the mortgage notes apply to commercial properties, the note holders might sell the notes and use the proceeds for a down payment on another property, as working capital for an existing business, or as seed capital to start a business.

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5. How Do I Sell A Private Mortgage Note?

   The basic process involves these steps:

   • Find a note broker or note buyer(s) to work with.
   • Provide the requested information about your note and your needs.
   • Review any offers to purchase your note and decide how you want to proceed.
   • If you accept an offer you will be requested to provide documentation, such as a copy of the note and mortgage.
   • Wait for the due diligence to be completed which will include underwriting of the note payor's credit history, the current market value of the property, and a title search.
   • Unless there is the need for additional information or discussion, a closing will be scheduled and you will be paid for your note.

   For a more complete answer of how I can help you sell a private mortgage note, The Process on my home page provides more details.

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6. How Much Can I Sell My Mortgage Note For?

   There are a lot of possible answers to this question. For starters, private mortgage notes are sold at a discount. But each note stands on its own. There are many factors that go into the pricing of a note. The major categories of factors are the details of the note itself, the current market value of the property which provides the collateral for the note, and the credit history of the borrower on the note, otherwise known as the payor or payer.

   So if you are looking for an actual price for your note, you need to have it appraised or obtain actual prices that willing buyers will really pay. It's more similar to selling a used car than looking online for a quick price. Yet you could probably get a better clue online what you can sell a used car for. But an actual buyer of a used car typically needs more information about the car, along with an inspection, test drive and a chance to negotiate the price.

   Is your note performing or non-performing? This means are all payments made on time, or are the payments in default, or somewhere in between. For a performing note you might find an offer of as much as $.90 on the dollar of the unpaid balance of the note. But for a great note someone might be willing to pay more. Then going back to the major pricing factors above, a buyer needs to review the details corresponding to each of those factors.

   If your note is non-performing the price will be reduced, once again based on the details. So whether your note is performing or not, be willing to spend some time to determine how much you can sell your mortgage note for. It helps to have a note broker on your side to produce a solution that best meets your needs.

   To help you increase the price you get when selling commercial notes, take a look at "Ideas For Structuring Your Note," in my article, Commercial Real Estate Notes Get The Job Done.

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7. Why Do Investors Buy Notes?

   Investors buy notes when they believe that they are a good investment. Notes are bought at a discount which increases the yield beyond the interest rate stated in the note. Investors typically buy secured notes which provides an advantage over other investments. That said, investors buy notes when they are convinced that these positive attributes are greater than the risks involved in buying notes.

   Ideally investors buy notes because they are well prepared to do so. Whether as personal investments or as a note buying business, note investors use a business mindset. They learn enough to have the confidence that the notes they buy will be profitable.

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8. What Are The Risks Of Buying Mortgage Notes?

   Here's a couple insights before a list of risks:

   Private mortgage note buyers don't loan money when they buy mortgage notes. Since they did not originate the note, they didn't have the scrutiny of the borrower, as a bank would in underwriting a mortgage.

   Second, since they did not originate the note, they also didn't have the same incentive to create a note as did the seller of the property. The seller of the property also had the tax benefits of an installment sale, until they decided to sell their note. These are important points to keep in mind when viewing the risks of buying mortgage notes, as does a note investor.

   Here are the risks a note investor considers before buying a mortgage note:

   • Risk of default - This can happen at any time during the term of the note including later when a balloon payment is due.
   • Interest rate risk - If market interest rate rise, the value of existing notes typically goes down. So changes in the economy can have an impact on a note after purchase.
   • Liquidity risk - A note buyer may need to liquidate a note or a group of notes some time after purchase. There could be urgency present. But the group of potential buyers is relatively small, thus reducing the liquidity of mortgage notes.
   • Risk of collateral devaluation - The market value of collateral is important in establishing the price paid for a note. After a note is purchased the value of the collateral may be reduced due to market conditions or deterioration of the property.
   • Time value of money considerations - A sum of money now is worth more than the same amount of money in the future. So there is risk in over estimating the future value of a note when calculating a purchase price

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9. How Do Mortgage Notes Make Money?

   I discussed in #7. above why investors buy notes. But before an investor buys a private mortgage note, that note was created as a way to finance the purchase of residential or commercial real estate. The person or entity that sold the property and created the note becomes the note holder. Money is made by the note holder, through the interest collected on the payments they receive for the note. The interest rate they receive is often better than what they may receive from other investments.

   The money note holders receive for their notes, also have the benefit of being secured by collateral. This makes mortgage notes more secure for example, than buying stocks.

   While a note can be sold, an alternative use of this asset could be trading the note for personal property or as a down payment on residential or commercial properties.

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   Bridge Loan Volume Up 59% In 2023

   "A bridge loan in this context means an interest-only loan of 36 months or less duration, with a balloon payment after the term. Bridge loans may be fix-and-flip loans or construction loans, or they may contain no construction feature and simply be a short-term financing option to “bridge” the borrower to a future sale or refinance. According to our data, visualized in Table 1, bridge financing has grown by 59% from February 2023 to September 2023. February 2023 was a historic low point for bridge volumes nationally." American Association of Private Lenders

   

10. Can You Sell A Private Mortgage?

    As discussed, private mortgage notes can be sold by the note holder, that is, the person or entity that is receiving the payments on the note. But if you are the person making the mortgage payments, you can not sell that private mortgage.

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11. How Do I Sell My Promissory Note?

    You can sell a promissory note the same way as selling a private mortgage note, described in #5. above. The process is exactly the same if you are asking about a promissory note secured by real estate.

    Promissory notes can also be secured by other collateral such as businesses, autos, boats, and land. The common principle is that each example involves documentation beginning with the promissory note, the note is secured by collateral and the process involves a stream of cash flow that requires payments. In each case the payments can be sold by a similar process as real estate notes, as long as you can find a willing buyer.

    This concept of cash flow streams, secured by collateral, that can be sold include divorce liens, casino and lottery winnings, annuities, cell tower leases, entertainment royalties, intellectual property rights, and licensing agreements. You may go here to request a quote for a promissory note.

    One more example is structured settlements. The right to receive payments as the result of a structured settlement agreement can be sold for a lump sum of cash. One difference from selling other cash flows, is that the sale of structured settlement payments are regulated by state and federal laws. Also, the law requires that the sale by approved by court order. This sounds more complicated but the main difference is that the regulations make the process of selling the payment rights take longer. Here is more information for you about structured settlements.

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12. How Much Can You Sell A Promissory Note For?

    The amount that private mortgage notes can be sold was covered above. For promissory notes that are secured by other assets than real estate, the same concepts apply. Every note stands on its own and and a group of factors is considered in pricing each note. Different buyers will have different views on the value of a note just like experts often disagree on other matters.

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13. What Is A Mortgage Note Rate?

    The mortgage note rate refers to the annual interest rate applied to the periodic payments, until the full amount of the principal has been paid. The interest rate is specified in the Note, and the Note is referenced in the Mortgage.

    If you may sell your note at some point, note investors prefer to see private mortgage note interest rates 2-4% above bank rates. This will depend somewhat on the quality of the note based on other purchasing factors. However as the seller of an asset when you create a note, you may choose an interest rate less favorable to note investors, in order to make your transaction work.

    When creating a note you also have options other than a fixed interest rate. My article "What's Better A Balloon Note Or Stepped Payments?" offers some ideas.

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14. Who Holds The Original Mortgage Note?

    If you have a bank mortgage, the original lender holds the note, unless they sell the mortgage note on the secondary market. Once sold the new lender holds the original mortgage note. The same sequence applies for private mortgage notes. At first the note is held by the seller of the property that created the note. If that note is sold, the private mortgage note buyer will hold the original note. Some private buyers may prefer that the original note is held for safekeeping by their attorney or title company.

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15. Should I Sell My Notes?

    That depends on your needs and opportunities, and the price you can sell your notes for. If you get a great price for a note, that might be enough reason to sell. But you may have a high motivation to sell, so the price will be less of a factor. I'm not suggesting that you take a low ball offer, but the note you hold may not have attractive characteristics to note buyers. At that point you could be happy just to find a buyer, and get some cash for a priority. If you hold more than one note, you may find that the timing is better to sell one of those notes in particular.

    Keep in mind the opportunity to do a partial sale. A properly structured partial could be the solution that you are looking for, and answer the question whether you should sell your mortgage note. For more information take a look at Partial Sales Add A Tailored Dimension.

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16. Is A Mortgage Note An Asset?

    Yes a mortgage note is an asset. According to Investopedia, "an asset is a resource with economic value that an individual, corporation, or country owns or controls with the expectation that it will provide a future benefit." A mortgage note provides economic value both through the periodic payments received and the value received if the note is sold.

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17. How Do Private Mortgage Lenders Make Money?

    Private mortgage lenders fall into two categories. First there are private lenders that offer an alternative to banks and related financial institutions. These private lenders make money by the interest they charge, which can be quite high compared to other sources of financing. However they may lend money when other sources will not. There may also be reasons that the borrowers prefer to deal with this type of lender. Depending on the details involved, some private lenders may also charge points in addition to interest.

    The second type of private lender is the private person selling an asset such as a business, retail or commercial property or other personal property such as autos and boats. These are the people providing seller financing. While they are called lenders, they do not lend money. They sell an asset and agree to receive payment in installments. These private lenders also make money by charging interest and can receive other economic benefits offered for example through installment sales.

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    "In today’s rapidly evolving private lending industry, a significant shift is occurring as traditional banks tighten their lending requirements. This shift presents a unique opportunity for private lenders to expand their presence and gain market share by filling the gap left by the restrictive policies of banks." National Private Lenders Association

18. What Does Private Mortgage Insurance Cover?

    Private Mortgage Insurance (PMI) is required when you obtain a conventional bank mortgage, and your down payment is less than 20%. It is provided by private insurance companies and the borrower pays for it, as part of the monthly mortgage payments. Bu it does not cover the borrower. PMI covers the lender if the borrower stops making mortgage payments. Even with this insurance in place, if you default on the mortgage, you may still lose your home in foreclosure.

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19. How Do I Sell An Unsecured Promissory Note?

    For starters consider this answer from the legal website Lawrina:

    • Establish the value: The first step would be to establish the value of your unsecured promissory note. This involves calculating the remaining principal and interest to be paid.
    • Find a buyer: You would then need to find a buyer — someone interested in taking over the rights to your unsecured promissory note. This could be a note buyer, investment firm, or even a private investor. Online platforms or local investment networks might be decent places to start.
    • Due diligence: Any potential buyer of your unsecured promissory note will likely request some time to conduct their own due diligence. This can include verifying the remaining balance of the note, examining the borrower's payment history, and evaluating the borrower's credit profile.
    • Prepare the sale agreement: Once a buyer is found, you will need to prepare a sale agreement. Primarily, this document transfers the rights of the unsecured promissory note from you to the buyer. It is crucial that this document clearly enumerates the terms of the deal; you don’t want any grey area here! Legal counsel could be worth the investment at this stage.
    • Complete the sale: Finish up by getting the sale agreement notarized and filing it appropriately. Especially for this finale, it's a good idea to check up on local or state laws — you don’t want to miss any obligatory filings or documents!

    While their first point suggests that you establish the value of your note, the actual market value is based on what a willing seller and a willing buyer can agree on. Just like the many points I have made above regarding secured promissory notes, a potential buyer of your note will base their estimate of value on other considerations important to them.

    While their first point suggests that you establish the value of your note, the actual market value is based on what a willing seller and a willing buyer can agree on. Just like the many points I have made above regarding secured promissory notes, a potential buyer of your note will base their estimate of value on other considerations important to them.

    Many typical note buyers, are only interested in secured promissory notes and will not consider unsecured notes. One option you could try are debt collection agencies. In addition to their work to collect bad debts, some of the agencies might purchase unsecured notes.

    It is also important to realize that unsecured notes can be used in many ways. The answer I am offering above pertains mostly to unsecured notes between individuals. Companies also use unsecured promissory notes to raise money. Regarding such notes, Investor.gov states "Typically, promissory notes are securities. They must be registered with the SEC, a state securities regulator, or be exempt from registration." Sellers of these notes must be licensed to sell securities.

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20. What Happens When You Sell A Promissory Note?

    When you sell a promissory note you get paid for it and the purchaser of the note takes your place as the owner of the note, also known as the note holder. The new note owner will send a notification advising the note borrower of this change. But nothing changes for the note borrower, other than where to send their payments. There is no change to the terms of the note.

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21. Why Should I Work With A Note Broker To Sell My Note?

    As a note broker I will work with you to give you the best value for your note. This involves a more in depth analysis of your needs, your note and the best funding sources to approach on your behalf. This also includes presenting your situation to note buyers in the most favorable way. And my approach will not be limited by any one note buyer's requirements and note pricing. So TAKE ACTION NOW!

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Further Reading

Real Estate Notes

Commercial Real Estate Notes Get The Job Done

Should You Use A Wraparound Mortgage?

Do You Have A Mortgage Note For Sale?

Commercial Real Estate Note Guidlines - Part1