Selling A Mortgage Note for Cash
Most of the time, if you sell your property, you’ll receive a lump sum of cash. However, sometimes you end up with seller financing instead. In this situation, you are holding a mortgage note yourself, playing the role of the bank as your buyer is making payments.
This can be a good investment: you’re receiving interest payments. However, holding a mortgage note can also be complicated. You may have not had a choice in holding the note yourself, and you’d rather have that lump sum of cash.
In this article, we’ll take a look at why you may be holding a mortgage note, why you may want to sell it for cash, how to go about making that sale, and important things to know during the process.
Holding a Mortgage Note Because You Had to Sell
Sometimes you end up holding a mortgage note because you didn’t have much choice. If the only way to sell a property is to offer seller financing, you may find yourself in the position of having to collect payments and handle all the associated paperwork and taxes, when all you wanted was a lump sum of cash for your property.
If the market was saturated, you may have had to advertise your property with “Owner Will Carry” in order to land the sale. Maybe your best offer was from a buyer that couldn’t obtain a traditional loan from a bank. If seller financing was your only option and you couldn’t afford to wait for a better situation, you may have taken on a mortgage note when you didn’t really want to.
If you’re in this position, don’t despair—you likely still have some options to get cash for that mortgage note. You just need the right info.
Holding a Mortgage Note as an Investment
Seller financing isn’t always a burden. Sometimes it’s a great investment. Holding a mortgage can give you the benefits of real estate without all the hassles that come with owning the property. You’re not a landlord—you don’t have to deal with maintenance, tenant hassles, etc. All you’re doing is collecting the buyer’s payments.
Investing in mortgage notes means that you’re in the same role as the bank. You’re collecting money from the property owner, and getting a great return on your investment, especially compared to the interest rates you can get from simply putting your money in the bank.
While mortgage notes can be a great investment, there are a variety of reasons that you may want to sell your note for cash, either in full or in part. Before we look at the how, let’s examine some of the reasons to sell a mortgage note.
Why Sell Your Mortgage Note?
There are many reasons that someone who holds a mortgage note may want to sell. Sometimes you might just need cash. As we discussed, sometimes seller financing is your only option, and you didn’t want to hold a mortgage not in the first place. You’d hoped to receive cash for your property sale, and instead ended up holding this note and collecting payments. Perhaps this has postponed your ability to make a big purchase.
Even if you made your investment in a mortgage note intentionally and have been happy to collect payments every month, you may still end up wanting to sell. Circumstances can always change.
- Maybe you have unexpected medical bills
- Maybe you have the opportunity to make a new investment
- Start a business
- Or you would just like to be able to make a major purchase
- Perhaps you have become unsure of the long-term ability of your buyer to make consistent payments
If you’ve found yourself stressed about the paperwork, payment collection, and all the tax requirements involved with seller financing, you may want to simplify your life by selling your mortgage note.
In any case, if you’ve decided to sell, you have several options. Let’s take a look at how you can approach selling a mortgage note for cash.
Selling a Mortgage Note
Whatever your reasons for needing to sell a mortgage note, you have options available.
You can even sell just part of a mortgage note.
This is called a partial purchase, and it can be a good way to get some cash quickly without having to sell the whole mortgage note.
Mortgage notes are part of a huge world of investments. Private buyers, consultants, and financial institutions all engage in buying mortgage notes. So, if you’re interested in selling your mortgage note, be aware that there are options. Plenty of buyers may be willing to take over a mortgage note, either as a whole or in part.
Working with a consultant
Consultants, or brokers, are a good option if you want to sell a mortgage note. It can be very hard to find a buyer directly, because many buyers only make their purchases through brokers, or they only purchase notes for property in a certain region. Another benefit of working with a consultant is that they can provide you with several options for selling your mortgage note.
Working with an investor directly
Another option is working directly with an investor. Some investors are willing to deal directly with people selling a note instead of only making a purchase through a broker. Sometimes dealing directly with an investor can lead to a better price, and the process may be more streamlined.
However, you’ll have to do a lot more legwork yourself. Even when you find an investor, they may not be interested in the particular type of mortgage note you want to sell. You may have to do a fair amount of searching to find the right buyer. And it’s always a good idea to get a few bids to ensure that your note is being valued fairly.
What You Need to Know Before You Sell a Mortgage Note
1) Mortgage notes are bought at a discount.
A mortgage note is hardly ever purchased at its full value, so don’t expect to get 100 cents on the dollar. This accounts for the cost involved with the purchase, such as a title search, appraisal of the property, and closing costs. Of course, the buyer will also want to earn a return on their investment.
One way to mitigate some of this discount when you sell a note is with a partial purchase. Selling only some of the payments on your mortgage note means that your investor will be willing to pay a little more for immediate returns, while you’ll get the note back and continue to receive payments later.
How much a note is discounted is dependent upon what we call the quality of the note which depends upon a few factors such as:
- How many payments are left on the note
- The buyer’s credit
- Down payment
- Equity in the property
- Payment history
These and other factors make up what is known as the quality of the mortgage note. These are the factors that a note buyer looks at when buying a note.
If you decide to sell a mortgage note, be sure to get several quotes. This will help you determine the market value of your note, so that you can be sure to get a good deal.
2) You’ll need proof of payments
If you are seller financing, it’s vital to keep good records. If you later decide to sell, these records can be a huge help in finding a buyer for your mortgage note. Proof that your buyer is making payments will be a benefit.
If you’re using an agency to service the note, you should make sure that you can get the appropriate records.
If you’re collecting payments on your own, be sure that your records are thorough. Keep cancelled checks or other accurate records of deposits.
An investor doesn’t want to invest in a problem. Having clear documentation that the person making payments on your note is consistent will go a long way to reassuring them that purchasing your mortgage note will pay off for them.
3) Your personal credit is not a factor
When you take out a loan, the lender evaluates your credit. But when you’re selling a mortgage note, your credit is not a factor. The quality of a mortgage note is evaluated based on many factors, including the note’s terms and the value of the property, as well as the credit of the property buyer.
Your credit history does not affect the quality of your mortgage note. A reputable buyer of mortgage notes should never check your credit or use it as a metric when deciding whether or not to purchase your mortgage note.
Just as if they were a mortgage lender, a buyer will check the credit of the property buyer. If you’re worried about this, because the reason you were seller financing is that your buyer did not have great credit. Investors are aware of this. They’re not necessarily looking for a great credit score, but they will be paying attention to their ability to make consistent payments.
Should you Sell Your Mortgage Note?
If you arrived at this article wondering whether it’s a good idea to sell your mortgage note, we don’t have a one-size fits all answer. Only you can make that decision. Hopefully, we’ve provided you with some useful information about what you’ll need in order to make a sale.
If you’re looking for more information, check out The Note Selling Formula. This eBook will give you more insights into the best way to sell a mortgage note. Just click the photo below to get your free guide.