Should You Sell a Whole Promissory Note or Only a Portion?
When you provide seller financing on property you own, you hold a promissory note. It’s a promise from the buyer to pay you back. A note is a real asset you own – like cash in the bank.
Like many investments, promissory notes are not liquid. If you need money, you can’t withdraw it from the note.
But you can tap into the value of a performing note by selling it to a real estate note buyer.
You don’t have to sell the entire note. You can sell a partial note instead.
Does it makes sense to sell your note? Should you consider a partial or whole note sale? It depends on the nature of your cash needs, the value of your note and your investment strategy.
Where Can You Access Cash When You Need It?
There are many reasons you might need cash – say, for an emergency vehicle repair, a child’s college tuition or a wedding. Perhaps you want to invest in different assets.
While you can borrow money to pay unexpected expenses, it’s not always a good option. For example:
- Personal and home equity loans require a lengthy application process, which may be too slow to meet your needs.
- Interest rates on loans may be higher than the rate on your promissory note.
- You may not be able to borrow all the money you need.
If you want to invest in something else, you may need to sell a note to free up cash.
When to Consider a Partial Promissory Note Sale?
In a partial note sale, you sell a portion of future payments for a set period of time at a fixed interest rate. You sell only part of the value of your note.
Suppose you hold a note valued at $100,000. You’re receiving monthly income from your borrower’s repayments. But suddenly, you need to raise $10,000.
With a partial note sale, You get $10,000 in cash up front by allowing an investor to receive some future payments on the note. Once these partial payments are completed, you resume receiving regular monthly payments of principal and interest from the note,.
Partial note sales are structured in different ways. Here are 3 examples:
- If you receive $277 a month in loan repayments, you might agree to let a note buyer receive $166 of that monthly payment, for the next 60 months.
- You might agree to let the note buyer receive all of the $277 monthly payments for the next 30 months. After that, you resume receiving monthly payments.
- Suppose there’s a balloon payment of $15,000 due from a borrower. You might agree to let the note buyer receive part of that balloon payment.
These are simplified examples. In short, note buyers give you a lump sum of cash. In return, they receive monthly loan payments for a set period of time, allowing them to recoup their cash payment to you.
Advantages of Selling a Partial Note
Selling a partial note can give you advantages. You get cash in hand immediately. And you still have future income from the note to look forward to.
When you sell a partial note, you lose less of the value of the note. The less of the note you sell, the less you forfeit to the note buyer.
Sometimes it’s easier to find buyers for a partial note, since some investors consider partial notes less risky than whole notes.
When to Consider Selling Your Whole Promissory Note
In a whole note sale, you sell an entire note for its full remaining value, minus discounts the note buyer receives.
There are many reasons to sell an entire note. You may be:
- Interested in investing in something different that may offer a higher return.
- Tired of depending on month-to-month income, and prefer to have cash readily available.
- Tired of dealing with monthly paperwork and recordkeeping.
- Nervous about whether a buyer will default on the note.
No matter the reason, selling a whole note is similar to selling a partial note. The amount of money you’ll receive in a note sale depends on many factors, outlined in How to Determine the Value of Mortgage Notes.
Ready to Sell Your Note?
If you’re thinking about selling part or all of your note, consider all your options. Be sure the sale makes the most sense for your needs and matches your investment goals.
When you decide to sell, first gather all the documents you need, namely:
- The deed of trust or real estate contract
- Title policy
- Proof of payments
- Information on escrow payments and disbursements
- Proof of tax and homeowner’s insurance payments.
Look for a reputable note buyer. Seek multiple quotes before agreeing to sell your note.
Once you settle on a buyer, expect a brief underwriting process and a short wait to receive your funds.
These are tough questions: whether to sell a note, and which type of note sale is best.
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