How Much Do Note Buyers Pay on a Note?

By Carole Vansickle

  • Overview

    In tough real estate markets, many sellers opt to create their own financing. That is, the seller loans the money to buy his property to the buyer himself. Often, this means relying on the existing mortgage or risking large amounts of capital, which means that the seller can ask a price that is higher than the current value of the home or charge a higher interest rate. However, if you have a personal note of this nature, you may not actually want to wait for the next 15 to 30 years to collect on it. If you want to sell your note for cash, then you will need to find a note buyer to purchase it from you.
  • Function

    A note buyer is someone who purchases mortgage notes from other people. Because he is delivering money up front on a loan that may take decades to pay off, he can pay much less than the total value of the note. For example, if you loaned $100,000 to someone with moderately good credit but fairly low income, then it would be a risky investment for a note buyer to pay you $100,000 for that note, since any change in that borrower's job situation could result in his defaulting on the loan. As a result, a note borrower would evaluate the risk that he is taking versus the rewards he would get if the loan was paid off in full, then come up with a figure that he is willing to pay for the note.
    Developing a personal note can help you sell your house fast in any market.
  • Significance

    A personal mortgage note has some real appeal for people who need to sell their houses in a slow market or in a buyer's market, because it enables them to take buyers that might not be able to get loans from traditional lenders. However, if you need the money that you make on your house to make a down payment on a new home, then you will need to have factored in the lower fee that the note buyer will be paying you when you figure your asking price. For example, many people need as much as 20 percent of the total value of the loan to get a loan in the current economy. This means that if you want to buy a $200,000 house, you need to have $40,000 left over after you pay off your other mortgage using the money that you get from the sale of your note.

  • Features

    Ultimately, note buyers tend to pay between 40 and 70 percent of the total value of the loan. This means that if you personally finance your house for $100,000 to a buyer with poor credit history and an unsteady employment record, if you can find a note buyer for your loan at all, you will probably only get about $40,000 for that note, if that. If you only needed $10,000 to pay off your existing mortgage, then you may be fine with coming out $30,000 to the good and no longer having the hassle of trying to sell your home. However, if you owe $60,000 on the house, then you will still be in debt after you sell the note.
  • Types

    There are several types of note buyers, and the type of note buyer that you are working with can influence how much she will pay for a note. Some note buyers are pure monetary investors and plan on ultimately collecting the entire value of the note. These note buyers are much more concerned with whether or not the note will be paid in full. Other note buyers are real estate investors and may be less concerned about a property going into foreclosure since they are happy to have real estate as well as collect on loans. Finally, some note buyers are simply "middle men," meaning that they will only buy your note if they think that they can resell it again immediately for a higher price. These note buyers will probably not give you the highest price possible for your note, but they often act fast and pay in cash.
  • Benefits

    There are a lot of benefits to working with a note buyer. If you sell your personal note, then you no longer have to deal with collecting payments and potentially dealing with a foreclosure situation if the borrower fails to pay. Also, you have money up front from the sale of your house rather than having to wait for years to collect the entire sum. Perhaps best of all, seller financing makes your property extremely attractive in any real estate market, and ultimately you may walk away with far more money from the sale of your house--and far more quickly--than you would using traditional sales methods.
  • Warning

    Any time that you are working in real estate transactions or lending and borrowing, make sure that you have a lawyer draft and review all your legal documents to make sure that you are covered in any situation. You do not want the note buyer to be able to come after you instead of your borrower if the borrower defaults on the loan, nor should you be liable once the property and the note have changed hands for accidents that occur on that property.
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