Increasing the value of your existing note doesn’t have to be complicated or time-consuming.
Many real estate investors are transitioning into note investing. And why wouldn’t they?
Note investing offers cash flow backed by real estate without the ongoing hassles of owning an investment property [Insert Toilets, Tenants, and Taxes here].
We could go on and on about the many benefits of investing in notes. However, you don’t own the real estate itself when you own a note. And that real estate has an upside worth mentioning: appreciation.
Someone can debate whether the normal appreciation of real estate outweighs the true cost of owning real estate over time. There is a good case for it being ‘break even’—basically, a great place to park money with the added benefit of potential tax breaks through depreciation.
So…what about notes? Do they increase in value? If so, how do you do it?
Do Real Estate Notes Appreciate Over Time?
This is really a two-part question (or answer).
When you are holding a note and the real estate value goes up, the owner of the property enjoys the benefits of property appreciation. As the note holder, you now have a payer with more equity in the property. They have more to protect and your note by virtue becomes more secure.
Unlike holding real estate, you may never want to sell the note. You may choose to enjoy the cash flow from the note. There is a good chance that is why you invested in the note to begin with.
That said, things change.
You could use the cash from the note for a better investment opportunity, purchase more notes, purchase a boat, or send someone to college.
Whatever the case, there are options. This is where note value comes in. The resell value of your note can be affected by a short list of items.
Some of those items are in your control. Owning a mortgage note (not real estate) does have some ‘improvement’ opportunities.
Three Quick Things That Will Increase Your Note’s Value
Sometimes, time and effort prevent us from doing things and checking items off our list. But these three things are well worth the time because they increase the value of your note.
Is The Note ‘Outside Serviced?’
I’m surprised this is still a conversation in 2024, but I’m going to guess that some old ways die hard. Many folks decide to collect payments and manage their note directly because the closing agents didn’t suggest an outside service or because saving $20-30/month sounds appealing.
Outside Serviced refers to who is handling the monthly payments as they are made.
The payer mails their monthly payment to the servicing company (also called a ‘servicer’). The servicer then processes the payment for a small fee and forwards the remainder to the note holder.
There are many advantages to having a note serviced by a third party, but since we are talking about INCREASING the value of your note, let’s settle on this one thing.
Nothing beats a non-biased third-party verification of the payment history.
When you go to sell a note, payment history will be one of the first things an investor looks for. Using a servicer goes much further than the note seller pulling out bank deposit receipts or, even worse, saying the buyer pays cash.
Additionally, they can help stay on top of keeping taxes and insurance current (a little foreshadowing here).
Keep All Documents Close – But Not TOO Close
When selling a note, the investor will consider a couple of things.
The face rate of the note, how long they have been paying, the property’s value, and so on.
You don’t want the investor to have to ‘guess’ on anything. If the investor is in doubt about a detail and still willing to provide you with a quote, normal human nature is for them to ‘hedge their bets’ and err on the downside.
If you want that investor to sharpen their pencil right out of the gate, send them the documents.
- Copy of the Note and Mortgage or Deed of Trust
- Copy of the Closing Statement
This at least ensures that the transaction details are clear and that the investor is using the best possible information to give you a quote. It also eliminates some of the back-and-forth and time for both the note seller and investor.
Side Note: These are important documents for you to keep a copy of (like on your computer), but keep the originals in a safe deposit box. The investor will need the original note at closing, and a copy will suffice for the quoting process.
Keep the Property on Your Radar
Many sellers or note holders are happy to receive their payments every month and never really check in on the payers or the property.
Don’t get me wrong—it is GREAT NEWS that the payments are coming in, and that will help you sell your note for top dollar, but you do want to keep a few other things on your radar.
Taxes and Insurance
Hopefully, when you sold the property, you also escrowed taxes and insurance every month. That means when the payer makes a monthly payment, they pay the amount owed on the note PLUS 1/12th of the expected taxes and property insurance.
I can’t tell you how many times a note seller has approached us with a ‘great note’ that when we get around to doing due diligence, we find that the payer has not paid property taxes for some time.
This doesn’t happen when taxes and insurance are escrowed, but if it was not, you need to check on this.
Don’t get me wrong; back taxes are not a deal killer when selling your note. We and many investors will still purchase the note, but guess what…
…someone needs to pay those back taxes before we purchase the note.
Sometimes, the payer will pay them (they did owe them, after all), but often, the note seller pays for them out of proceeds. This could have been completely avoided if you had stayed ahead of the curve and ‘checked in’ on the property occasionally.
Increase the Value of Your Note
Other methods of increasing the value can make a big difference. Some are just out of your control, such as the home’s value going up or the buyer making improvements.
Other methods are in your control.
Outside servicing, keeping the documents organized, and having up-to-date taxes and insurance can all help you get top dollar when you sell a note.
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