You might have heard that you can “flip” your real estate note for some quick money. However, if this is something that you’re considering, it’s important that you know how the whole thing actually goes down.
We talked about how to structure a real-state mortgage loan to maximize its value in the last article. Now let’s talk about how to sell the mortgage loan once you get paid for it.
Most real estate agents start out by thinking about selling the whole property. If that scenario fits their financial situation and the property is likely to fetch a good price, they might consider going for that option.
But wait, you must at least know about other options in order to decide which option is best for you. Sometimes, lenders like the interest rates they receive on the loan, but just want to get some money now. Or, what happens if your loan does not satisfy some of the requirements to earn a high value? It is possible, and frequently to your benefit, to simply sell some of the payments off. This is known as a partial, and it may often give you a much better return.
Example of a Partial
An example would help here. Let us assume that you had bought a home for $120,000 and given your lender $20,000 as an initial deposit. Your loan was for 180 months at 7%, so you were paying $1,800 per year. After two years you needed to make a further $10,000 deposit to keep up with interest charges. You might then decide to sell the property for $140,000, giving yourself a profit of $10,000. However, if you paid off the entire mortgage early, you’d end up with the full amount of money you originally put into the property. So, we can say that the total value of the home was $160,000. To calculate how much you owe, divide the original purchase price ($120,000) by the current market value ($160,000): 120,000 ÷ 160,000 = 0.75. Then multiply this figure by 12, to get a monthly repayment of $9,000.
There are several different ways to structure the note so that you get paid for it at different times. You may want to talk to someone who knows more about notes than we do here.
These things mentioned above and in the previous paragraph are mainly relevant for first lienses. If you have a second lien, where there exists a lender who holds a more senior lien than yours, then you might be able to sell the loan, but the prices that you get will not be nearly as high. It would take a lot of effort to sell these types of loans because they require buyers to invest their own money into them.
Getting Started
Now that you’ve received quotes for both a complete buyout of the loan and for a partial purchase of the loan, you’ve chosen the one that best suits your needs. Since buying loans isn’t heavily-regulated in most jurisdictions, you do want to be careful working with a reputable lender or broker. Here are a few points to keep in mind when choosing an investor or broker:
- Don’t be fooled by unscrupulous buyers who may ask for an up front fee before providing any kind of quote or checking their buyers’ trustworthiness.
- There shouldn’t be any points, closing cost, or other fees added to the final payment. All fees are already included in your final payment.
- If the seller requires you to buy an appraisal or title insurance, they’re probably trying to get out of paying their share of the closing cost. You should ask them why they want you to do that.
- Make sure that the investment banker who is giving you the loan has a written purchase agreement for the property. Be sure to clarify any issues that may arise regarding the terms of the deal.
- Make sure the note investor checks the borrower’s financials before investing in their loan. There have been instances where borrowers quote a lower interest rate than they actually pay, usually because the borrower wants to get the deal done quickly. This “bail out” tactic is definitely unethical and illegal.
Here’s how you sell your notes: It’s easy and straightforward!
- Please contact us for more details regarding the property.
- We respond within about 1 day with your offer.
- We require that you provide us with documents verifying that the property has been paid off (the deed of trust or mortgage) and that you’ve received proof of payment from the bank (closing/settlement statements). If there has not been an appraisal done recently, we will pay for one.
- It usually takes three to five weeks from when we accept your quote until we send you the payment. You can opt to receive the payment by check or electronically.
You might want to sell your notes if you need some extra cash. If you have any further questions, please don’t hesitate to get in touch with us at any time.