How To Sell Your Owner Financed Real Estate Loan

How To Sell Your Owner Financed Real Estate Loan

If you've ever taken out a mortgage with a bank then maybe you've experienced this: about 6-8 weeks after closing you receive a letter from a totally different lender who now has control of your loan and you are to send the monthly payments to them.

Well the original bank sold your mortgage or real estate note for cash to another financial institution that wanted a long-term cash flow investment. If you have "owner financed" the sale of your house with the buyer you can do the same thing. Sell your deed of trust or real estate note for cash to an investor who is looking for a long-term cash flow. There are lots of different names for a note: Deed of Trust, Contract For Deed, Mortgage, Loan, IOU, Promissory Note and others. For simplicity sake I'm going to use the term note.

Let's say you have $80 in one hand and $100 in the other and I said you could keep only one. Well you'd keep the $100 of course but what if I told you you could have that $100 but it will be paid out at $1 a month over the next 8 years but you can have the $80 right now. Well that changes everything.

If you looking to purchase something really special for your family or to pay off some high-interest, nagging debts; maybe you have another promising investment opportunity, or you simply prefer not having the responsibilities and risks of carrying a Note then selling your note to an investor is a great option.

And due to the economic situation, the price an investor will pay for a real estate note has never been higher.

There are even investors who will purchase notes that are behind in payments! If you are frustrated and not getting your monthly payments and you just want to be done with the whole thing I can help you find an investor who will purchase that delinquent note. This includes semi-performing and non-performing mortgage notes. Get rid of that headache note and let someone else deal with it.

So who is going to buy your note?

Well there are various people and companies who like to invest in real estate notes instead of the stock market, commodities or apartment buildings. They could be a one-person operation, or an office of 4 or 5 people, or 20 people, or a big investment house of 100 people. I don't put your note on a web site forum and hope somebody sees it or market to people right out of a "How To Invest In Real Estate Notes Seminar". I work with only reputable, long-term investors.

Here's how it works:

You're interested in finding out about to selling your note. Get in touch with a broker who specializes in selling owner financed loans. They will take all the information about the property and loan from you and begin looking for an investor.

When an investor is found they will take a day or so to crunch the numbers, assess their risk and see if it's a good investment for them. If they are interested they make what is called a soft quote, which is their best offer before having reviewed any supporting documentation, such as the payee's credit report and property appraisal. The quote will state something to the effect: "subject to review of credit - assumes good credit" but pricing should not change that much unless the property value comes in low or the homeowner has a low credit score.

If you accept their offer you'll draw up an "Option of Purchase and Sales Agreement" with the investor. The investor then starts their due-diligence on the property and the homeowners. Just like selling a house -- home inspection, appraisal, credit checks, copies of legal documents, payment history and verification of current balance. This enables the note investor to verify the information provided, analyze the risk, and confirm their pricing of the note.

Once all the "T"s are crossed and "I"s dotted and contracts signed the investor takes control of the note and the title company sends you a check.

How long does this take?

About 30 days. It can happen in 7 or 10 days and does but the average is 30 days and if it happens in less time then everyone is happy. But with all the paper work, inspection, appraisal, somebody goes on vacation, somebody's kid gets the measles, the time ads up.

How much does the note have to be for?

Most investors are looking for notes of $100,000 or more although some will buy notes for less. So notes for $100,000, $250,000, $500,000, $800,000, 5 million and everything in between. There are all different kinds of investors looking for all different kinds of note amounts.

How old can the note be?

It can be brand-new or many years old. While age is a factor it's just another part of the overall picture that the investor is looking at. Holding onto the note for a number of months or years, what's known as "seasoning" the note, can increase the price but doesn't guarantee it will. It's possible that maybe the property might devalue in price. What if the homeowners rack up a lot of credit card debt buying appliances, furniture, landscaping or remodeling and their credit score goes down? An investor looks at many things when assessing risk on a note and how old the note is is just one of them. A 3-year-old note with a bad credit score might be priced less than a 3-month-old note with a great credit score all other things being equal. Every note is different. Brand new notes and 10-year-old notes are sold everyday.

You can also do a simultaneous closing, where a few days after the close of the house with the buyer you receive a check for the note. If you're going to owner finance your home and you know you want to sell the note this is a great way of doing it because the investor is there for the process and you don't have to start over again 6 months later with the appraisal, inspection, credit check, etc.

Now the big question - how much will you get for your note?

This unfortunately I can't answer, as there are too many variables involved. Each transaction is unique so an investor looks at several key factors for pricing. These include the type of property and location, down payment, equity, the buyer's credit, how long the buyer has been paying you, and the terms of your note like interest and monthly payment amount. All that goes into their risk assessment and they make their offer based on that. Having said that though an average note will demand anywhere from 80 to 93 cents on the dollar depending on those factors.

It is possible to just sell some of the payments.

This is called a partial. You want the monthly income but are in need of $50,000 cash right away. An investor could give you that $50,000 in exchange for buying "x" number of monthly payments, after which the note reverts back to you for the remainder of the term.

You could structure a deal so the you get a lump sum of money now plus also receive a part of the payment each month. You can sell the payments but get part of the balloon payment. There are 101 ways of getting creative with real estate notes.

Now all this information applies to 1st liens on the note.

If you have a 2nd lien, where there is a bank or another investor with a more senior lien against the property, you may be able to sell the note, but the price that you receive won't be nearly as high. Unfortunately investors just aren't that interested in 2nd lien notes or mortgages right now.

Why should you use a broker when you could sell the note yourself?

Working with a broker can be very beneficial and they can actually make you more money.

Investing in Real Estate notes is very unique and not a lot of people do it. Most people don't understand the process and you need large amounts of cash on hand to invest with. That's why most people invest in stocks or brick and mortar real estate, you don't need that much capital to get started. So there aren't a lot of people investing in owner financed real estate notes. And 95% of the people out there just came from a "How To Get Rich Investing In Real Estate Notes" seminar. They only have $100,000 they've taken from their 401K and they were told that there are bargains out there to be found. Since they will only be able to invest in one or two notes they are looking for amazing deals and they will be really picky. They really don't know what they are doing and you're going to spend a lot of time with them and then get offered 50-60 cents on the dollar.

A good broker will work with only legitimate investors who are increasing their financial portfolios by investing in real estate notes. There are only a handful of them and they each have certain kind of notes they are looking for. They don't like to advertise themselves because then they are inundated with lots of quotes requests they have no intention of buying. They use brokers so that they will weed out the kind of notes they are not interested in. If an investor likes deals only over $250,000 and yet is constantly getting quote requests for deals under $80,000 it's a waste of their time and resources. A broker is a very valuable asset to an investor.