Seller Financed Homes
Roughly one in five homes sold today involve some sort of seller financing. Rather than the buyer getting a mortgage through a third party such as a bank, the buyer simply promises to pay back the seller over a set period of time with a set interest rate. There are many reasons for this: less paperwork, easier to qualification requirements, shorter closing times, and more. It is easier for the buyer and can also make the house easier to sell for the seller.
Instead of the buyer taking out a loan from the bank, the buyer works directly with the seller. They agree on a down payment, interest on the loaned amount of the sale price as well as a payment schedule, for example $1,000 a month every month for 20 years.
But what happens if, after 10 years have passed, the seller decides they want the rest of the money up front? For example, if the total loaned amount + interest was worth $150,000, $75,000 has been paid and the seller decides they just want the rest of the $75,000 as one lump sum. The buyer cannot just give them $75,000 to pay it off, where can they turn? That is where note buyers come in.
The document which details the terms of the loan is known as a promissory note, although it is also referred to as a mortgage note. It is the note that promises the buyer will pay back the seller at the appointed rate over the appointed period of time. It is this promissory note that note buyers buy.
Essentially, a note buyer is a third party organization that steps in, pays the original seller the price of the note then takes over receiving payments from the buyer. Nothing changes for the buyer, except who they mail the checks to every month to cover the cost of the loan. The seller, however, receives their remaining payment in a single lump sum.
This lump sum given by the note buyer is usually discounted, however. For example, if there is $75,000 remaining on the mortgage note, the note buyer might give $60,000 to the seller in return for the note. Doing this allows the buyer to make some profit on the transaction and reduce risk in case of default on the part of the original home purchaser.
Why Would I Want to Sell My Note to a Note Buyer?
There are many reasons that people might have for seeking to sell their note to a note buyer. Perhaps they need a large amount of money to pay off their own loans, or are looking to have money to start a business or purchase a new property for themselves. It can also save sellers from the hassle of collecting payments every month. Whatever the reason, note buyers exist to fulfill this need.
It generally takes between one and two months for a note sale to be processed when working with note buyers, sometimes less. If the home seller is in need of the money in a short amount of time, selling to a note buyer can be a good way to get that money when they need it.
Most often the note seller accrues no out of pocket costs in selling a promissory note. All costs are paid for by the note buyer rather than the note seller.
Depending on circumstances, selling your note to a note buyer can be a good thing. However it is important to remember that there will be a loss on the amount of money paid for the note, you will never be able to receive the full value of the note from a note buyer.
Things Note Buyers Look At When Buying a Note
Just because you have a promissory note does not mean that note buyers will immediately purchase it from you. There are things that they look at when considering to purchase a note. This generally includes:
Current value of the note – This tells the buyer how much money is left on the note
Payment schedule of the note – How many payments are left on the note, how much an individual payment is and for how long payments will be made.
Payment history of the buyer – The note buyer looks to see how well payments have been made in the past on the loan, how timely those payments were and how many missed payments their may have been.
Current value of the property – Tells how much the property is worth in case the buyer defaults on the note and the note buyer must foreclose on the home.
More often than not, however, there are few problems in a note buyer accepting a note. If you are the owner of a note who wants to cash out, there are many note buyers out there who can help you achieve your goals and take that note off your hands.