If you provide seller financing on real property that you own, you’ll end up holding a promissory note – a promise from the buyer to pay you back. A promissory note represents a real asset that you own – cash in the bank so to speak.
But like many investments, promissory notes aren’t exactly liquid. Meaning, if you find yourself in need of a large sum of money for any reason, you can’t just take a withdrawal out of the bank.
But, this doesn’t mean you’re out of luck when you need cash. That’s because you can still tap into the value of your performing note by selling it to a real estate note buyer. And it doesn’t have to be the entire note, a partial note sale is an option.
Whether it makes sense to sell your note and whether you should consider a partial note sale or whole note sale is dependent on various factors. These include the nature of your cash needs, the value of your note, and your overall investment strategy.
Your Cash Needs and Whether You Can Access Money Elsewhere
There are many reasons you might find yourself in need of easily-accessible cash. You may end up with an emergency vehicle repair, you may need to come up with money for a child’s college tuition, or want to pay for a wedding. Or you may simply be interested in a different type of investment vehicle for your money.
While you could always borrow money to pay for unexpected expenses, it’s not always the right option. For example:
- A personal or home equity loan often requires an application review by the bank. If you need money quickly, a loan requiring a lengthy application process may not be a viable option.
- The interest rate that’s currently offered by a lender may be higher than what you’re receiving on your promissory note.
- You may simply not be able to borrow as much money as you need.
And if you’re looking to invest your money in something else, it’s obvious you’d need to liquidate your note to free up the cash.
When to Consider a Partial Note Sale
A partial note sale means you are selling a portion of your future payments for a set period of time and at a fixed interest rate. Just part of the value of your note.
Suppose you hold a note valued at $100,000 and you’re moving along just fine with the monthly income from your borrower’s repayments. Suddenly, you find yourself in need $10,000. With a partial note sale, you agree to let an investor receive just some of the future payments on the note. You’ll receive the $10,000 cash up front. But you’ll also still be able to look forward to regular monthly payments of principal and interest from the note, once the partial payments are completed.
A partial note sale can be structured in many different ways. For example,
- If you’ve been receiving $277 a month in loan repayments, you might agree to let the note buyer receive $166 of that monthly payment, for the next 60 months.
- Or, you might agree to let the note buyer receive all of the $277 monthly payments for the next 30 months, after which time you resume receiving the full monthly payments.
- Or, if you have a balloon payment that’s due from your borrower of, say, $15,000, you might just agree to let the note buyer receive part of that balloon payment.
These are very simplified examples, but they should give you the general idea. The note buyer gives you a lump sum of cash and in return, they receive the monthly loan payments for a set period of time that allows them to recoup their payment to you.
Advantages of Selling a Partial Note
Selling a partial note can represent an advantage to you. It allows you to realize immediate cash, and you will still have future income from the note to look forward to.
In addition, when you sell a partial note, you don’t lose as much of the value of the note. That’s because whether you’re selling part of your note or the entire note, the note buyer receives a discount. The less of the note that you sell, the less money you forfeit to the note buyer.
It is sometimes easier to find a buyer for a partial note. This is because some people consider partial notes a less risky investment.
When to Consider a Whole Note Sale
A whole note sale means you’re selling your entire note for its full remaining value, less discounts that the note buyer will receive.
There are numerous reasons to sell an entire note.
- Wanting to invest the money into something different that might realize a higher rate of return.
- Tired of depending on month-to-month income, and prefer to have the entire cash balance readily available.
- You are tired of dealing with the monthly paperwork and record keeping involved.
- Nervous about the potential for a buyer to default on the note in the future, which would require a fair amount of work and lost income on your part to rectify the situation.
Regardless of the reason, selling a whole note is similar to selling a partial note. Keep in mind that the value of your note – the amount of money you’ll receive, is dependent on numerous factors. These are outlined in our previous article How to Determine the Value of Mortgage Notes.
When You’re Ready to Sell Your Note
If you’re thinking about selling either part or all of your note, it’s important to fully consider all of your options. Be certain it makes the most sense for your particular needs and matches your specific investment goals.
When you decide to sell, you’ll want to gather all associated documentation, including:
- The deed of trust or real estate contract
- Title policy
- Proof of payments
- Information on escrow payments and disbursements
- Proof of taxes and homeowner’s insurance payments
Be sure to look for a reputable note buyer and seek multiple quotes before agreeing to sell your note.
Once you’ve settled on a buyer, expect a brief underwriting process and a relatively short wait before receiving your funds.
We know the question of whether you should sell your note, and what type of note sale is right for you, can be a difficult one.
If you have questions about selling your mortgage note, want to know whether it’s a good option for you, or would like a quote on your note, Alvernia Capital can help. Contact us online and a member of our team will be in touch with you to discuss your specific situation.