With all the talk about buying and selling notes, does anyone actually take a pause to see IF they should sell their private mortgage note?
Course the usual short answer is, “Well, depends on how much I can get for it.” – In reality, you might want to delve a bit deeper.
Ask yourself the following five questions when deciding to sell.
Did you want to carry back the note in the first place?
Many people never wanted to become note holders to begin with. They may have taken back the note to facilitate a buyer that had less than perfect credit. They may have held a note because offering owner financing was the only way to get people to notice their house for sale in a flooded market.
Whatever the reason for the note creation, if it was not your “first choice,” you may want to consider selling.
Did you create the promissory note for an investment?
Many people carry back notes for investment purposes – and why wouldn’t they? You can set a very attractive yield – much better than your local bank money-market account – AND have the whole thing backed by real estate.
Not only is it backed by real estate, it is backed by real estate that you are VERY familiar with…it used to be yours!
Remember, if you don’t need the money now or don’t have a place to invest for a higher return, keeping that money working for you can be a great plan.
Do you need all the money?
This may sound new to some of you, but you may not need to sell the entire note.
Notes are purchased at a discount. It is not really a closely guarded secret – the amount of “discount” is a combination of several variables such value of property, interest rate of the note, payers credit, location, seasoning.
For example, if you wrote a note for a low interest rate, say 4%, you will be looking at a greater discount. 4% is not a very attractive return for the average investor looking to buy notes.
But, all is not lost.
If you have a note that is faced with a higher discount, it may be better to only sell SOME of the payments.
Say you have 240 months left on your note. You may elect to sell only 120 or even 60 payments. You will get a lump sum now AND you will get the note back again later. You can then sell more payments or go back to receiving the monthly amount.
This type of sale is called a “partial” and it can be a great way to minimize you discount.
Are you ok with the hassle?
I’m not going to sugar coat it, there are some things that are just a pain.
For example, if you are receiving note payments, you should be reporting them to the IRA annually for the payer (they can use the interest as a tax deduction).
You also want to keep track of insurance and make sure you are the primary beneficiary until such time as the note is paid off.
There are also real estate taxes to be certain the buyer is keeping current.
And, of course, you are going to have to collect a payment each month. Some payers are great and always on time. Others are…well… not so much on time (if at all).
Owning a note is not an overly taxing set of procedures, but it will take some of your time. Perhaps selling the note – even at a discount – is worth it to not deal with any of those hassles again.
Did something better come along?
Got a hot tip on a stock going through the roof? See a chance to invest in a business or real estate? Maybe you just want some money to do something you have never done before.
Look it is YOUR note and YOUR money; don’t let anyone tell you differently. You might want to sell for the simple fact of having a lump sum of money affords you to do things you can’t do with small payments trickling in every month.
In the end…
Most people sell a note for one of three reasons.
1. They need to get rid of some bills that have been piling up.
2. They want to buy something fun (a boat, car, cruise, or travel).
3. They have a new investment opportunity.
WHY you want to sell your note is your business. But keep in mind that one, you don’t’ need to sell the whole note, and two, your best “investment” just might be to keep it.