Selling a mortgage note or real estate note is actually a pretty simple process. However the success you have in selling comes more from the initial creation than it does in the marketing of your note. What I mean by this is that the original terms and conditions set forth in the mortgage note when you first sell the property and write up the note are going to play a much bigger role in the sale than will when, how, or who you are trying to sell your note to.
Every mortgage note ever created is unique in its terms and conditions. It is these unique factors that will ultimately determine the value of your note when it comes time to sell. Variables such as sale price, property value, down payment, interest rate, length of contract, buyers credit score, and others will all play an important role in determining the value of your note. When you create a note with intention to sell at a later time you must understand the role these factors play in the valuation process. Only then can you create terms and conditions that will be beneficial to you in the sale.
Although it is sometimes unavoidable you need to try to structure your deal to be more seller friendly than it is buyer friendly. This will help you produce the terms and conditions that will allow you to later sell your note and meet the bottom line figures you are trying achieve with the sale of your property. You must structure the deal with your own goals in mind and not those of the buyer. Whenever possible do not give in to buyer demands.
Tip #1: Become both an investigator and a salesperson. As an investigator it will be very helpful for you to find out as much as possible about your buyer before you even begin to negotiate terms. Try to find out why they are seeking a seller financed purchase, what their credit score is, why they cannot get traditional financing, how much cash they have available for a down payment, and how eager are they to purchase. This is all key information that will give you bargaining power to work this deal in your favor. As a sales person you need to sell your buyer on the benefits of buying now with seller financing opposed to later when prices and interest rates may climb, even though this may cost them a bit more on the front end.
Tip #2: Since you are going to carry financing remind your buyer that YOU are taking on all the risk in this transaction and therefore “They” must make the concessions you require, not vice versa. You are quite possibly doing them a huge favor by carrying the financing as you should have found out during your implementation of tip #1. Make them understand that you are not a huge financial institution and should they–god forbid–default on you this could be extremely difficult on you and your family financially.
Tip #3: Understand that when it comes time to sell a note you WILL take a discount off of the remaining balance that is due to be paid. With that in mind it is very important you run the numbers before you agree to them. Be sure that the total of the down payment, money from however many payments you will collect prior to selling the note, and the amount you will be able to sell your note for will all total up to a grand total that suits YOUR needs. Now you have the power to negotiate with your buyer and not find out later that your bottom line has been compromised.
Tip #4: Try to plan on holding your mortgage note and collecting payments for the longest period of time possible. While it is “possible” you “may” be able to sell your note within the first 3 month of ownership, a minimum of six months is much preferred and of course 9, 12 or even longer is better for you and the price you will be able to sell for. This time period known as seasoning will play a big role in determining the value of your mortgage note and the longer you season it the less of a discount you will take.
Tip #5: Since you are taking on all this risk and doing such a huge favor for your buyer by carrying the financing it is not out of question to establish a purchase price higher than your asking price. If through your investigation period you find out they are very eager to buy, cannot get traditional financing, have a large down payment, or have less than stellar credit you will have the bargaining power to ask for this.
Tip #6: Try to get a 20% or greater down payment–especially if you already know they have it. The reason for this is the investor who wants to buy your mortgage note is going to want less than or equal to an 80% LTV-Loan to Value. LTV is determined by the amount owed divided by the property value. Here’s the tricky part. Even though you may be selling the property below market value, when it comes time to sell your note the sale price you sell for is going set a market value on the property. Now this can be overcome with an appraisal that proves a higher market value but even then the full appraised value will be diminished by your low sale price, thus raising the LTV.
Tip #7: Try to get the highest interest rate possible. At the very least you want something over the prime rate, but the higher interest rate you can get the smaller your discount will be at the time of sale. Seven or Eight percent is pretty good but something closer to or even above Ten percent will bring you the best price on your note sale. The investor who buys your note is trying to achieve a specific yield–rate of return–on their investment and a low interest rate on your note will force a larger discount to achieve that yield.
Tip #8: Only create a fully amortized real estate note. You do not want to devalue your note by creating crazy terms with adjustable payments or interest only payments. Investors want notes with payments that include both principle and interest. An added plus you can throw in is to have the taxes and insurance impounded into the loan–meaning that the buyer will send a bit extra each month to cover these payments so you or the new buyer will never have to worry that the buyer is not making these payments.
Tip #9: Establish the shortest repayment schedule possible. While a 30 year fully amortized loan is fine a ten, fifteen, or twenty year loan is much better in terms of your notes resale value. The sooner an investor can expect to recoup all of their investment and yield the smaller your discount will be. Balloons are perfectly fine, this means there is a specific date in the near future the investor can expect to have this loan paid in full.
Tip #10: And one of THE Most important of all. Get a copy of the buyers credit report and score. DO NOT Ever take their word for it. The credit score is the one thing that can absolutely kill your mortgage note sale. You will never sell a note if your buyer has a score under 500. Anything up to 600 is going to bring a steeper discount. You want scores over 600 if possible, and of course the higher the better. But this is why a copy of the report is also important. If they can show you, or you can determine their score is on the rise opposed being on the decline then you can chance a lower score against the length of time you intend to hold on to the note.
Tip #11: Incorporate the assistance of a Note Service prior to the seller financed sale of your property to help you with the deal structure and creation of your note. Then you will also know exactly who to go to when it comes time to sell
Tip #12: For those of you who are not intending at this time to sell the note you will create, think about this. Even though the economy is in a bad situation right now, the opportunities in real estate to grow your net worth have never been bigger. Low prices combined with ultra low interest rates–both of which will not last forever–make a compelling argument for you not to just sit and collect these small monthly payments. Instead cash out your note and reinvest in an opportunity that is going to pay off even larger over the years to come. Besides what are you even going to do with those small monthly payments and think ahead to the day when you collect the last one, What will you have to show for it?
An experienced note buyer can and will be happy to help you through a seller financed sale of your property and should only ask in return that you bring the note to them when it comes time to sell.
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Specializing in privately held mortgage notes created from a seller financed sale of real estate. Residential, Commercial, Multi-family, Apartments, Vacant Land, Special Use, and Industrial Property. We also buy Business Notes created from the seller financed sale of your business.
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