There are several factors that are considered when selling a real estate note:
Time Value of Money.
Your real estate note will never be worth more than it is today January 23, 2018!
Money generally decreases in value over time. Today you can buy less with a $20 bill than you could twenty years ago. That is the reason why a lump sum today is worth more than a lump sum 20 years from now. Is called the time value of money.
Also, with lower interest rates, many investors are buying privately held mortgage notes as relatively safe investments.
You, the note holder benefit from this by receiving a high payout and the most flexible purchase options than ever before. Keep that in mind when selling your mortgage note.
Interest rates fluctuate creating bull and bear markets in the Stock market. Real estate notes are long-term instruments and are also affected by interest rates. Here is an example:
You own an 8%, 30 year real estate note. Interest rates are down and are hovering around 4.5%. Your note is appealing to investors, because it is offering a return bigger than the return at prime rate.
If interest rates shoot up, there is a point where other instruments will be more appealing to investors than real estate notes. In this case, the value of the real estate note could go down, and your 8% note would not be as appealing as it was before.
The opposite could also be true. An 8% note would suddenly be more appealing if the interest rates go down to 2%. However, this is a general rule, as there are other factors which would also need to be considered. Market conditions matter.
Credit record of the Payer.
The credit history of the Payer could affect considerably the value of a real estate note. For example, if the Payer had B credit three years ago, but has been unemployed over the last year and has some collection accounts on credit cards and a couple of tax liens, the credit rating may now show D credit.
Even though the Payer may be making timely mortgage payments, risk has now become a factor for any investor interested in purchasing the note. The note would go down in value and/or appeal.
The opposite may also be true. If the Payer's credit improves, your note may become more appealing, relatively speaking. Watch the credit record of the payer.
Equity on the Property.
This applies to both Residential and Commercial properties. Most real estate properties appreciate over time, that is they go up in value every year. But occasionally the real estate market gets into a slump and properties go down in value 10, 20, 30% or even more.
If last year you issued a 90 percent LTV mortgage on a property that just lost 30% of its value, your note has gone down in value, too. In fact, in this example, the note balance is greater than the equity on the property.
Note buyers prefer generally a large equity on the property to get cushioned against sudden slumps. Most buyers consider a 10-15% equity or less a risk, and either stay away from these notes or price them accordingly. Equity is very important.
As a note is being paid off, the payer builds up his credit and becomes credit worthy in the eyes of the note buyer. A note that is at least 1 year old, is considered a seasoned note by most buyers.
Note Holder's relationship to the Payer.
Over the years, we've seen that the closer the relationship between the note holder and the payer, in the event of a fractured relationship, the higher the risk for a situation that could lower the value of a note.
Sometimes employers hold notes for employees. If the employee is dismissed, the value of the note may go down.
Sometimes spouses hold notes for their significant others, where the value of the note may be affected if there are marital problems.
There are even cases of certain types of extortion that payers exercise over the note holders. Something along these lines: 'You want to sell your note? Well, if you want me to paint the building and repair the roof to validate the appraisal, you are going to have to shave off 5% of the outstanding balance. Oh, and we need you to refinance the mortgage, too. Just a 3% reduction in interest rates. Thank You." By the way, these people were friends.
We are not advocating that you should never hold a mortgage for a loved one or for an acquaintance. We would simply like you to be aware of all these factors. Relationship to the payer is important.
Most note holders created their notes for individuals or businesses that would not have qualified otherwise for a traditional loan. For most lenders, these payers are considered 'risky'. Any investor when buying a seller-financed real estate note assumes that extra risk.
This applies mostly to commercial properties. If the building you're holding a note on, has, for example, a Dye Maker and a Night Club as tenants and somebody just found some old rusted leaky tanks on a storage facility on the rooftop, you are facing a large liability risk and your commercial note could lose value.
But you don't own the building, right ? It doesn't matter. The perception is that the dye maker could generate some environmental liability, the Night Club could become part of a drug or money laundering ring.
As a result, the building owner (payer) could become embroiled in a multi-year investigation/lawsuit/litigation, that could render him insolvent. The payer may still pay every month on time, but the note may go down in value, regardless.
We would be happy to discuss the details of your mortgage note with you !
We take pride in providing our clients with quick, professional, and courteous service, working with them to meet their cash flow needs.
You will rest assured that you have received the highest payout on your mortgage or real estate note. Call us today! We will provide you a quick no obligation quote usually within 24 hours. If you contact us at the end of the day or at the end of the week, we will process the information the following business day. You can also fill out our online Quote request form.