Author: Frederick B Webb Jr.
A basic understanding of what note investors look for when buying notes.
The first thing you want to understand are the basic categories of mortgage notes.
They are: Residential, Mobile Home, Commercial and Vacant Land notes.
Recognize that in certain parts of the country they are referred to using slightly different terms but nonetheless, they can all be categorized as one of the above mentioned.
Residential Notes
are notes created from the sale of residential properties, like: Houses, Condominiums, Townhomes and 1-4 family unit buildings.
Mobile Home Notes
are promissory notes secured by a mobile home and the land it is on.
Commercial Notes
are notes originating with the sale of any type of commercial business property, like: offices, apartments, industrial properties and warehouses.
Vacant Land Notes
are notes on developed or undeveloped land, or land not designated as a specific use property such as:
farm land, waste storage, does not include land that has been improved for development and building.
Now that we've covered the types of notes there are, let's keep it simple and move on...
The next set of basics we need to cover are:
*What determines the value of your note?*
Knowing the factors that determine the value of your note will save you a lot of time when it comes down to entertaining the offers you'll receive from note investors.
*What payout options fit your situation?*
Not everyone needs to cash in their total note, so depending on your situation, you may find that you wish to structure a purchase with options.
Note Basics 101:
What determines the value of your note?
Type of property securing the note:
The more secure the collateral, the more valuable the note.
Owner-occupied, single family residences are more secure than rental property, because the payor is less likely to default on payments and risk losing the roof over his/her head.
Unimproved land is risky, although some of the investors in our network do specialize in this area.
The owner has paid less for it, and it is draining cash in the form of property taxes and other expenses.
The owner of an unimproved lot may decide it is cheaper and easier to default on payments and lose the lot than it is to sell it.
Down Payment amount:
Consider percentage of sale price as well as actual dollar amount. The more the buyer has invested in the property in the form of a down payment, the less likely he/she is to ""walk"".
Terms of the note:
A shorter amortization (term) on a note also will bring a higher bid from a private mortgage buyer.
Shorter term notes have higher monthly payments, and higher monthly payments generate higher bids.
Payment history of the note:
Payment history is a good indicator that payor is credit worthy.
Timeliness of Payments:
Reliability is also a good indicator that payor is a good risk for an investor.
Equity:
The more cash the payor has invested in the property, the less likely he/she will be to default on payments.
Position of note:
1st, 2nd, or 3rd position note. It's a rare find to get an investor willing to take a third position note seriously.
Interest rate on the note:
The higher the interest rate, the more the investors will offer for the note.
The ideal situation is when your note's interest rate is 10% or higher.
Location of property:
If the property is in a good location, it will be more saleable in the event the payor ""walks"".
Owner of the property:
The investors will consider the payor's credit history in general as well as the payment history on the note.
*Additionally,
Investor quotes will also be contingent on:
Satisfactory credit of the payor (based on analysis of personal credit history from credit reporting agency) Verification that the property currently appraises at or above its stated value (based on drive-by appraisal) Verification that the title is free of defects (via updated mortgagee's title policy)
The next thing that needs to be understood is the way purchases can structured and how they affect the payout options.
Below you will find the typical payout options:
Full Purchase Option - The investor buys the entire note. This alleviates the seller of the responsibility to collect payments in the future and to be completely done with the note all at once.
Straight Partial - The investor purchases a predetermined number of payments in order to meet the seller's cash requirements.
After the last payment of that predetermined term ends, the balance on the note reverts back to the seller.
Reverse Partial - The seller receives a lump sum and continues to receive the full payment amount for a specified period of time.
This solution is appropriate when the seller needs a large amount of cash at closing but also wants to receive the monthly payments for a while.
Split Payment - The investor purchases half of the seller's monthly payment; the seller continues to receive the income from the other half.
Balloon Only - The investor purchases only the balloon due at the predetermined date on the promissory note.
This alternative works in situations where the seller needs some cash at closing but doesn't want to wait 30 years to collect the balance.
Once again. It's that simple.
Now all you need are the forms to submit your note information to a note investor and Direct Access to the note investors waiting to buy them.
Where to go from here...
In addition to understanding these simple basics, you now need to decide whether you wish to use the services of a broker or whether you'd rather handle it yourself.
Up until now, I would have always recommended a broker.
Brokers are in the know as it relates to ""who"" is buying notes and paying fair prices for them.
Also, brokers can submit your notes to these buying parties on your behalf.....saving you time.
Knowing what I know today about how people get ripped off by brokers, I no longer recommend going this route.
That kind of things brings notoriety on the profession.
Please don't misunderstand, not all brokers are bad. I have published an article called 'Picking The Right Broker', you can access it at: www.mortgagenotecash.com/TheRightBroker.htm
Now that you know what factors determine the value of your note and what the typical payout options are, I strongly recommend selling your note yourself....
because, even though using a broker saves you time, it does not save you money......nor is it supposed to.
We have created what we call the Direct Access Directory and it gives you the same contact information brokers use to place your note with a new buyer.
Why not find and pick your own buyer? It'll save you thousands on fees you would otherwise have never seen.
So, if you are ready to save hundreds or even thousands of dollars bypassing note broker fees and dealing with the actual note investors directly, you need to get your copy of our Direct Access Directory.
For more information about the directory, go to: www.mortgagenotecash.com/directaccess.htm
About the author: Frederick Webb is a Certified Cash Flow Consultant and is President of Webb Funding Group, a small debt brokerage firm he runs with his wife, Kashita Webb.
For more information, visit their site: www.mortgagenotecash.com
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