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Understanding and Selling Mortgage Notes: A Comprehensive Guide

Good morning, everyone! Welcome to Episode 22 of “Grantees Up In,” where we dive into the ins and outs of the real estate world. Today, we’re focusing on selling mortgage notes. If you’re curious about how to sell these notes, this is your go-to guide. Let’s dive in!

Introduction to Mortgage Notes

A mortgage note is essentially the promise to pay back a loan with specific terms. Whether you’re a private lender or a real estate investor offering seller-financed mortgages, you’re dealing with notes. These notes allow you to structure long-term payment plans while maintaining liquidity. One of the common fears about long-term mortgages is the perceived lack of liquidity, but selling your notes can provide a way out.

What Is a Note?

Simply put, a note is a mortgage. It’s a lending scenario where someone agrees to pay back a loan over time with interest. The terms might be something like 8% over ten years. Regardless of whether you’re lending to an investor or an owner-occupant, it’s all called a note. It’s a written promise to repay a debt with interest.

Creating and Selling Notes

Most real estate investors, including myself, love creating notes. Seller financing is a key strategy. It enables us to offer mortgages to buyers, putting them into long-term plans while securing steady cash flow for ourselves. However, not everyone understands that these notes can be sold to gain liquidity.

Why Sell a Note?

You might wonder why anyone would want to sell a note. The answer lies in balancing current needs with future gains. While holding onto a note can provide long-term income, there are times when immediate cash is essential. Selling a note allows you to capture a lump sum of money, which can be useful for various reasons—whether it’s funding a new investment, covering an emergency, or any other immediate financial need.

Understanding Paper Quality and Compliance

Before going deep into selling, it’s crucial to ensure your “paper” is in order. Good paper means the mortgage was closed through an attorney, with all proper documents like the note and deed of trust in place. Moreover, compliance with regulations like Dodd-Frank is essential. Proper compliance ensures that your note is attractive to potential buyers.

How Note Sales Work

Selling a note involves several key steps:

  1. Determine Unpaid Principal Balance (UPB): When selling, the value of your note is based on the UPB. This is the remaining amount the borrower owes.
  2. Seasoning the Note: Most buyers want to see a history of timely payments, usually for six months to a year. This “seasoning” proves the borrower’s ability to pay.
  3. Discounts and Yields: When selling, you likely won’t get the full UB. Instead, buyers will offer a percentage—often between 86% to 92% of the UPB, depending on the note’s quality and the buyer’s required yield.

Calculating the Sale Price

The note’s sale price hinges on the buyer’s required yield. For instance, if a buyer wants a 13% return, they’ll calculate how much they’re willing to pay for the note to achieve that yield. This means, for a $90,000 mortgage at 9.5% interest, if the buyer needs a 13% return, they might offer around $68,000. Conversely, if they can settle for a 10% yield, the offer might jump to around $86,000.

Balancing Today Money and Tomorrow Money

The key to smart investing is balancing immediate cash needs with long-term income potential. Selling notes can provide that balance. You might sell a note to capture enough equity to pay off underlying loans and pocket a substantial sum while still holding onto future income from secondary notes or partial payments.

Creative Note Strategies

  1. Partial Note Sales: You can sell part of the note, say the first 10 years of payments, and keep the rest.
  2. Splitting the Note: Create a first and second lien, sell the first to pay off any existing loans, and keep the second for ongoing income.

Why This Matters

Being able to sell notes provides flexibility and liquidity. Whether you’re facing an emergency or seizing an investment opportunity, selling a note can provide the cash you need without waiting decades.

Closing Remarks

Selling mortgage notes is a strategic tool in the real estate investor’s arsenal, offering a path to immediate liquidity while balancing long-term financial goals. By understanding the intricacies of creating, maintaining, and selling notes, you can turn your real estate investments into flexible and lucrative ventures. Whether you need quick cash for new opportunities or wish to alleviate financial pressures, selling mortgage notes allows you to leverage your assets effectively. 

Remember, the key to success lies in ensuring your notes are well-structured, compliant, and attractive to buyers. Embrace these strategies, and you’ll find yourself well-equipped to navigate the ever-evolving real estate landscape. Thank you for joining us on Episode 22 of “Grantees Up In”—stay tuned for more insights and tips on mastering the real estate world!

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