Frequently Asked Questions
What is a Real Estate Note?
A real estate note is a document (or documents) secured by real estate that obligates one individual or company to make payment(s) to another individual or company. These notes are created when a piece of real estate, such as a house, is sold. The purchaser gives the seller a cash down payment and the balance is paid to the seller in periodic, usually monthly, installments. Therefore, payments are made from the property purchaser (payor) to the property seller (payee). The property seller provides the financing to the purchaser the same way a bank normally does. This is called seller-financing or owner-financing. The legal documents that accomplish these tasks generally take one of three different forms: Promissory Note & Deed of Trust, Promissory Note & Mortgage, or Real Estate Contract. The generic term for each of these is a Real Estate Receivable. For convenience, we refer to all real estate receivables as "notes." The payments a property seller will receive from these notes are an asset and like any other asset can be sold for a lump sum of cash.
Why would I want to sell my future payments?
There are perhaps as many reasons people sell their notes as there are ways to spend money. We always ask note sellers why they wish to sell their note. The most frequent responses we get are: 1. To eliminate the risk and responsibility in holding the note; 2. To achieve liquidity; 3. To take advantage of other investment opportunities; 4. To pay off debts; and, 5. To make specific purchases. Often people never wanted to carry back a note in the first place but had to in order to sell their property. Other situations, such as notes provided as equity settlements in divorce cases, inherited notes, to name just two, often result in the current note holder owning a note they never wanted. Often these people are happy to receive the current value of their note in cash and move on with their lives.
Why is there a discount?
Whenever future payments are sold for cash today the current balance is always sold at a discount. There are two reasons for this: 1. The balance of the loan is paid back to the payee over time--and time erodes the value of money; and, 2. The stated interest rate on seller-financed notes is not high enough to induce investors to purchase these loans. Therefore, to increase the yield to investors, you must sell the cash flow at a rate of return greater than the note rate. You do that by selling the note at a discount from its current principal balance.
How much should I expect for my note?
The amount of cash a note can be sold for depends on three general components: 1. The current economic environment. 2. The terms of the note (payment amount, interest rate, length of payback, etc.); and, 3. The probability that the note holder will lose his/her money (degree of risk).
The current economic environment influences the yield or rate of return an investor requires when purchasing a note. In general, the better the economy, the lower the cost of funds for the investor, and, therefore, the lower the yield we require on the investment. Currently (June 2008), we are in a good economic environment as far as interest rates are concerned. Today's low interest rates means more cash for note sellers than ever before--and perhaps, more than will ever be paid in the future.
We must examine the terms of the note (#2 above) and the degree of risk (#3 above) individually for each note offered for our purchase. Many people would like us to quote a fixed percentage of the remaining balance on their note. This is not possible due to the large variability inherent in these two components. However, in most cases, we can evaluate all three of the above components and make a cash offer for your note while still on the initial telephone conversation.
You should become familiar with the factors that affect the value of your note.Email us, give us a call or fill out the quote request form. You will get our best quote.
Can I sell just part of my note if I don't need all of my cash now?
Yes, in fact this is very common. It is referred to as a "partial purchase" and involves selling only a certain number of the remaining payments on your note. At Cascade Funding, Inc., we can purchase any number of the remaining payments in almost any manner you can think of. For example, let's say you have a note with a balance of $80,000 payable in 240 monthly installments. If you needed just $20,000 now for whatever reason, we would calculate how many payments we would need to purchase to provide you with that specific amount of cash. Precisely which payments we purchase depends on your personal financial situation. Here's a few of the options we could look at for you:
We could buy (Numbers are for illustration only):
- A certain number of the beginning payments on the note. For example, we might purchase the first 60 payments and you would receive the final 180 payments.
- A certain number of the final payments on the note. For example, we might purchase the final 180 payments passing through the first 60 payments to you.
- A certain percentage of each of the remaining 240 payments on the note. For example, we might purchase 50% of each of the 240 payments. You also would receive 50% of each of the 240 payments.
Remember, all of the above options will provide you with the $20,000 needed today. The type of partial purchase chosen will depend entirely on your unique financial situation. In other words, you may choose the first option if you need $20,000 today and want or need to have a future monthly cash flow beginning in 5 years. You might choose the second option if you need $20,000 today and you need a monthly payment for the next 5 years until, say, your retirement benefits begin. And you might choose the last option if you need $20,000 today and also want or need the monthly 50% payment for the next 20 years.
There are many other ways we can structure the partial purchase for you. Our goal is to get you the specific amount of cash you need NOW while also addressing your financial concerns of the future. A real estate note is a remarkable asset when you can intelligently sell your payments to an investor able to provide you with such a rich variety of possibilities.
How long does it take to close?
Generally, it takes 2-3 weeks to close on a real estate note from the time we receive all the required documents. A title report and an appraisal are ordered, which are what take the longest.
How do I receive my money?
Upon closing, money is usually wired directly to the escrow company/title agency for disbursement.
How long does it take to get my money?
Your money will be sent upon closing or shortly after. Remember that it generally takes 2-3 weeks to close.
Who pays the closing costs?
Sometimes we pay closing costs and sometimes the noteholder does. Every deal is different. You can always tell us if you prefer us to pay closing costs and we will make an offer accordingly.
Is there a maximum or minimum size note that you buy?
There is no maximum. Generally we prefer that the note be a minimum of $20,000, however we look at each note on a case by case basis.
Do you lend money?
No, we do not lend money. We purchase already existing notes secured by real estate.
Do you charge for providing a quote ?
I’m concerned about confidentiality, what shall I do?
You should always be concerned about confidentiality. Your private financial information should be kept private.
Do you buy bank notes?
Yes we do buy portfolios of notes from large financial institutions, performing and non-performing.
How can I make sure that I’m getting a fair price for my note?
Unlike the primary mortgage market (mortgage companies and banks) where you know exactly the interest rate and costs involved, the secondary market (that’s us) sets the offers based on a different set of rules.
Due to the high risk involved with these transactions, there is always a discount on the face value of the mortgage. The size of the discount will depend on a variety of factors, most of whom are described here. Rest assured that we will make the best offer we can give you.
How do I set up an owner carry contract to make it attractive to a note buyer?
The top three aspects we look at are the interest rate, borrower's credit worthiness, and loan to value. Make sure the interest rate fits the borrower's credit rating. As an example don't give a buyer with a 500-630 an interest rate of 6.5%. The higher the rate the more attracting the note is!
Make sure the home is accurately appraised so any offer provided to you won't be lowered later in the note purchase process by the property not being valued as anticipated. Highly important is the recording of the lien documents to the local County's Recording office. Make sure this is done properly by simply having a local title company draw up the paper work and submitting them.