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Do You Have A Mortgage Note For Sale?

Collage of Euronotes

By Robert Duplicki      September 27, 2023

Like the image above suggests, there is money to be found in your mortgage notes. Are you ready to find the best value for your note, and the best way to structure the sale of your note? Then click here, complete the Real Estate Notes worksheet, and I will get to work for you. You may find it beneficial to read on as well. And if you're not sure how to proceed, I encourage you to find some helpful answers below.

Consider The Terminology

Mortgage notes are also known as real estate notes, and you will find related terms used interchangeably. In the cash flow business we are referring to secured promissory notes used as part of the documentation in the sale of real estate. This applies to both residential and commercial property including land.

While the Note is the legal document that specifies the monetary terms of the sale, the Mortgage is the legal document that specifies the collateral that secures the note. Some people may call the Note a mortgage note, or the Mortgage a mortgage note, or both documents combined, as the mortgage note. Bank mortgages and private mortgages are sold as assets, but such sales refer to both documents that were used in the original transaction, when a property was purchased.

Adding to the confusion, the Note can be secured using documents given names other than mortgage. This depends on the State where the property is located, as well as the documentation that meets the intentions of a particular deal. Instead of a mortgage you may have a deed of trust, contact for deed, land contract, or agreement for deed, among others. And some people will refer to any of these as their mortgage.

The important part is to keep in mind the distinction between the Note, and the Mortgage. Plus both documents are part of the process when selling a mote. Notice that they are capitalized when referring to the actual legal documents.

All Kinds Of Properties And 50 States

I represent investors who will purchase notes in all 50 states. Not all investors will, and they often have differing criteria determining what they are willing to buy, and therefore who I should approach on your behalf.

All types of commercial properties can be used as collateral to sell a commercial note. Mixed use properties also qualify. For residential properties here are some examples of collateral securing mortgage notes:

  • Single-family owner-occupied
  • Single-family rental
  • Mobile homes with land
  • Condominiums
  • Town homes
  • Vacation/Second homes
  • Multi-family (2-4 units. 5 units and up are considered commercial property)

This list is not all inclusive, but represents common residential properties for which mortgage notes have a larger number of interested buyers. So I can sell these mortgage notes for you in all 50 States. Mobile homes without land, is an example for which the mortgage note will have less interest and I might find buyers in only certain States. The key is that we work together so I can find the best options for you.

In the secondary market all notes are purchased at a discount. The less favorable the characteristics of the note, the larger the discount. But by knowing the note business, I can help you minimize the discount. Of course some notes will have little to no interest. But before you get scared away, know that "difficult" notes are purchased when the right investor is properly approached. This applies even if other buyers have declined to buy your note. Let me find the answer for you.

Sell Your Note In The Most Favorable Way

You can sell your mortgage note in whole or part. What you are selling in either format, are the remaining payments you are scheduled to receive, based on the terms of your note. In return you will receive a lump sum of cash at closing. This most accurately describes what happens if you sell the whole note, meaning all the remaining payments.

A partial sale involves selling some of the remaining payments in a variety of structures. Usually you will receive a lump sum of cash at closing for a partial sale, and more money later. Partial sales have many positive aspects as described below.

But selling the whole note may best fit your needs. Certainly like so many other financial transactions, holding a note has risks and obligations. You may no longer want the responsibility of collecting payments or chasing after late payments. Perhaps you want to eliminate any concerns about foreclosure and taking the property back. Selling all remaining payments will eliminate these issues, and give you the largest lump sum of cash for your note.

A related possibility to selling the whole note, is selling the whole note while receiving your cash from the sale in installments. This could reduce your tax liability from the sale of the note, while transferring the servicing of the note.

If you are more comfortable with keeping part of your note, then sell only the part that gives you the amount of cash you need now.

The amount of cash you currently need for some purpose is a good way to start thinking about partial sales of your note (partials). Then we can get creative in structuring the ideal partial for you.

Let's say you have 120 payments remaining to collect from your note. Depending on the market value of your note, how much of that do you need right now? Whatever that amount is, the best deal for you would reduce the number of payments that you need to sell to receive that amount.

So if selling 45 payments gives you the desired lump sum of cash, after the note buyer receives the next 45 payments, you will have the note reassigned to you. You are then in position to receive the remaining 75 payments. A common advantage of the partial sale is that the discount applied is typically less than if you sold the entire note.

A split-payment partial is another way to structure the sale of your mortgage note. Under this option you still receive part of each remaining payment, and sell only a portion of each payment. So if the payments you receive are $400.00 monthly, you could sell only $100 or $200 of each payment, or whatever amount works best for you. Once again at closing you receive a lump sum of cash. Then you receive a monthly payment for the difference of what you sold, from the total monthly payment. After the agreed number of payments is received by the note buyer, the note is reassigned to you, and you begin to receive the full amount once again.

If your mortgage note has a balloon payment, it can lead to other possibilities in selling your mortgage note. For example, you may be able to sell only the balloon payment, or not sell the balloon but sell all or some of the payments prior to the balloon payment.

More Options

In order to best meet your needs when selling your note, perhaps a more customized plan will do a better job. Each of the methods above has the intent of meeting your needs, but let's say you advise me that you want to sell your whole note, yet would prefer to receive some cash for the next two years. A customized plan could combine a split-payment partial with a full sale of your note. The ideal solution will be based on your situation and what you qualify for.

For a lot of note holders a partial sale is the better way to go. Another advantage of the partial is that you can sell more payments in the future. Depending on how your situation evolves, when the first partial sale is near completion, you may choose to do another partial sale. You can think of the process as similar to a line of credit. Or you may choose to sell all remaining payments when the original partial sale is completing.

The Process

The short version is you complete a worksheet that provides me with necessary information. I contact you to get a more complete understanding of your situation and to answer any questions that you have. Next I make a submission to various note buyers, and get back to you with my proposal. We can fine tune things as needed and our finalized agreement is put in writing. The buyer will complete their due diligence and if all looks good, a closing is scheduled through a local title company. All closing costs are paid by the note buyer. Your lump sum of cash is paid to you at closing.

For more details I cover "The Process" at my home page. That process is similar for selling most notes. For mortgage notes which fall under the category "real estate notes," I will cover additional insights below.

My real estate note worksheet gathers typical information required to sell a mortgage note, and more as well. The typical information alone really isn't enough to satisfy most note buyers, and doesn't learn enough about your situation to provide the best deal for you. But some providers aren't as concerned about this as I am. So if you are in a rush, and someone tells you what you want to hear, don't be surprised when the deal doesn't close.

My worksheet asks for contact information and information about the property and the note. I also need to learn about the payor as well as some other details about the structure of your note, and what you are looking to accomplish in the way you sell your note. Add any comments that you want to.

When you are completing the worksheet it will help you to have some items at hand. This includes the note, mortgage or other security agreement and the closing statement from the sale of the property. You might want to take a look at my worksheet now, to get more faimiliar with the process.

After we have an agreement to move forward, there will be a list of documents required by note buyers as part of their due diligence. Some will require certain documents before providing a quote. Others see this as a waste of time, as long as the process provides the information essential to provide a quote. Unless the note seller indicates otherwise upfront, the quote is provided under the assumption that the note payor's credit score is good, and that the current value of the collateral is at least equal to the sales price of the property.

Here is a list of the type of documents you will be asked for:

  • Promissory Note
  • Mortgage or other security agreement
  • Closing Statement
  • Title Insurance Policy
  • Proof of adequate Property Insurance
  • Real Estate Sales and Purchase Contract
  • Information about the Payor/Debtor such as place of employment and S.S. number
  • Verifiable payment history (canceled checks or bank deposit record)

Initially copies of these documents are needed. In order to close, the original Note and Mortgage are required. The list above is a pretty standard basic list. Buyers may have their own requirements. There is also the realization that note sellers may have a hard time finding these documents. Some of this information could be obtained from the original closing agent or title company.

A common question among note sellers is "how long will this take?" It's a good idea to allow three weeks after a complete package of information is provided. There is also supplemental information that should prove helpful if available. Examples are a recent appraisal, survey and plat map of the property. The idea is, what else can you provide that will enhance the process of selling your note. Keep in mind that the note buyer will order a credit report, property valuation and title work, and pay for it.

Frequently Asked Questions

First let me offer some clarity. There are at least 8.5 billion Google searches per day. Users click Google’s first result 39.6% of the time.(3) So people are n a hurry, and there's an assumption that a high quality result is being presented first. Keep in mind that the Google algorithm that ranks search results, values domain authority. Large websites have greater domain authority. So a website answering a "frequently asked question" might be large, but they might not even be in the same industry that the question pertains to.

A word like "note" can be used in different ways. For example, questions about banknotes. What's a banknote? A dollar bill is an example of a banknote. But many of the questions about banknotes will be phrased "bank note." Not exactly the same, but search engines will rank all articles about "notes" when providing answers about "banknotes"

When you are searching for information on a topic like "mortgage notes," things can get even more confusing. People with limited background will ask questions in ways not used in legal documents or by professionals. And you will find answers that don't answer the question, or don't answer it well. Part of the reason comes from questions not being ideally phrased. Another reason is answers provided by large websites that may not be the ideal source to provide the answer. So my suggestion is put some extra time in, in order to learn better.

What is a mortgage?

"A mortgage is an agreement between you and a lender that gives the lender the right to take your property if you fail to repay the money you've borrowed plus interest. Mortgage loans are used to buy a home or to borrow money against the value of a home you already own." (2)

This definition that I'm sharing comes from the Consumer Financial Protection Bureau. I found this by searching Google for "what is a mortgage." This is the first search result and also appears at the top of the page under the section "People also ask."

Over in the right column of the same Google page they have a section titled "About." Here is the answer Google provides there: "A mortgage is an agreement between you and a lender that allows you to borrow money to purchase or refinance a home and gives the lender the right to take your property if you fail to repay the money you've borrowed" This definition is also attributed to the Consumer Financial Protection Bureau. But the link only takes you to their home page, rather than to the exact source of the paragraph. Can you see the difference between the two answers?

It appears that the answer provided under "About" paraphrases the direct paragraph from the Consumer Financial Protection Bureau. Isn't the paraphrased answer better? For people new to mortgages, the first sentence in the direct quote from the Consumer Financial Bureau might scare them away from mortgages. And it doesn't give you a clear answer to remember.

This is an example of the caution I offered above about the top answers you find while doing web searches. Once again, I suggest that you put some extra time in to learn better.

In addition to the preferred definition above, a mortgage also allows you to borrow money from a lender for residential investment property, commercial property, and land. Of course there is more to know, so read on.

What is a note?

A note is a document used in conjunction with a mortgage, and is the promise to pay back the lender, and designates the financial details that apply. The mortgage is the document that lists the property being used as collateral for the agreement you made with the lender. So this sheds some light on what the Consumer Financial Protection Bureau stated about taking back your property if you fail to pay back the money that you borrowed.

What is a mortgage note?

A mortgage note is a real estate note comprised of a mortgage and a promissory note. As I indicated above, some people will use the phrase "mortgage note" to refer to a mortgage, others to the promissory note. In addition to a mortgage, the note can be secured by other financial instruments including a deed of trust, contact for deed, land contract, or agreement for deed, among others.

What does a mortgage note include?

To provide an image based answer, I am including a Note(4) and a Mortgage(4) from Fannie Mae (FNMA). Fannie Mae purchases mortgages from lenders, including banks, thrifts, and credit unions, so that the lenders can use that money to make other mortgage loans. Fannie Mae is also the source of many forms that banks use such as Mortgages, Notes and their widely used Uniform Residential Loan Application (FNMA1003). The Note and Mortgge included above are actual examples. These forms can be modified, and different but related forms are often used.

Is a mortgage note a lien?

Yes it is. According to Rocket Mortgage(5), "A lien is a legal right that gives an individual or entity a claim to a collateral property until the outstanding debt is paid off. If the debt goes unpaid, the issuer of the lien has the right to take the property back from the borrower."

Referring to the Note example above, at the top of page 1, the address of the mortgaged property is to be listed. On page 3, Section 10 connects the Note to the Mortgage, or other security instrument. It states that the security instrument "protects the Note Holder from possible losses that might result if I do not keep the promises that I make in this Note." In the Mortgage example I provided, on page 1 it makes specific reference to the Note and the date it was signed. There follows on page 4 of the Mortgage a section titled "BORROWER’S TRANSFER TO LENDER OF RIGHTS IN THE PROPERTY" It states:

"I mortgage, grant, and convey all of the Property to Lender, to secure the payment of the Loan, and my performance of the promises and agreements under this Security Instrument and the Note. This means that, by signing this Security Instrument, I am giving Lender those rights that are stated in this Security Instrument and also those rights that Applicable Law gives to lenders who hold mortgages on real property."

This connection between the Note and Mortgage, and the wording used, makes the mortgage note a lien.

When is a good time to sell a mortgage note?

The time that's best for you will be different than for others. So my first suggestion is don't let the general advice about buying and selling notes, or varying market conditions, stop you from doing what works for you.

Ideally, you have an excellent opportunity to use the funds from selling your note, the note has all positive factors about it, you get connected to the right note buyer, and that note buyer is highly motivated to buy your note. How likely is all of that at the same time? That doesn't mean that things have to be just right to get a good price for your note.

There are plenty of reasons why notes are sold. Rather than the money received from monthly payments, you may need a larger sum of money for health expenses, education or to help someone else. Likewise a lump sum of money now might give you the funds for a business or investment opporunity. And with the various ways to sell your note in the most favorable way that I discussed above, you have the chance to get a lump sum of money, in addition to ongoing and future payments from your note.

Your current story may not be as favorable. You may not be comfortable holding your note for the full term, while a note buyer wants more notes and has more experience dealing with notes. Or you could inherit a note that's not performing, and want nothing to do with it. There are note buyers that buy such notes.

"Do It Now" is often a good way to get the job done. So get prepared, and take action now to determine your best course of action. Complete a worksheet so that I can help you.

Further Reading

Real Estate Notes

Commercial Real Estate Notes Get The Job Done

Should You Use A Wraparound Mortgage?

How Do You Overcome The Barriers To Home Ownership In 2023?

34 Questions About Home Equity Lines Of Credit (HELOCs)

Commercial Real Estate Note Guidlines - Part1


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