So you have received your quote and are debating whether to sell or keep your loan. As we discussed in earlier articles, your quote was affected by the following items:
This entire discussion can be summarized into a simple statement: How closely did you originate and service the loan as compared to a commercial bank? Let's get into it: When it comes to your loan’s value, your loan can fall into three quite different tiers. The different tiers / worlds are completely distinct and command vastly different values. Inside each of the three different tiers, there are grades based on the type of loan and several other factors. Please keep in mind, all loans are extremely unique & this discussion is extremely simplified. This entire discussion revolves around the grading of the loan or pricing to the risk. There are numerous other scenarios that can affect the loan’s grade besides just collateral type. There are a high number of complexities that can not be covered in this article which can affect the value of your note. Additionally, this is my opinion of the market & all companies / note buyers have different criteria.
The three different note tiers are as follows:
Let's go into more detail about the 3 tiers: Sometimes, not selling your note is not in your best financial interest & the note might not be an emotional drain on your life. A note can sometimes provide a steady stream of income, at a fairly low risk level. Always keep in mind, the principal portion of the monthly payment is your investment and should not be spent; we can spend interest, but principal needs to be reinvested. The S&P 500 has a 10-year average return of 13.6%; so, there are a lot better places to park your money than a note. Generally, most notes in this market are an Illiquid fixed income asset & with marginal professional servicing the value of the note can be maintained.
If you decide to keep your note, what can you do to help maintain your loan’s value? Holding / owning a note is sitting in the lender’s chair, so servicing and watching your investment is the key here. Do these three things to service your note, maintain its value, and protect your investment: So you're ready to sell your note. While there might be several unknowns of how to complete this transaction, selling your note is the best way to alleviate your personal needs, move on to your next adventure, and receive a lump payment of cash.
While you have many things going on in your personal life, selling your note is a big deal and can be a big financial decision. You probably have countless memories and emotional attachments to your borrowers, and you want to make sure they are treated fairly and have a good relationship with whoever purchases your note. Throughout this article, the terms "note" or "mortgage" will describe various financial debt obligations. These debt obligations or notes have different terms or jargon used to describe them. These additional terms could consist of the following: Note, Mortgage, Promissory Note, Deed of Trust, Contract for Deed, Loan, or Note Mortgage ETC. Additionally, throughout this article, the notes being sold generally will be "seller originated notes" or loan created outside of traditional financial institutions. Your note is your "Personal Property" and can be sold at any time. Note sales, assignments, or transfers are performed very commonly by financial institutions but are less commonplace when done outside of these traditional (bank) environments. If you're ready to sell your note mortgage, you want to do it the smart way. This article will help you learn how to sell your note quickly and for the most money. Let's get started! Selling your note or mortgage can be confusing, and what you initially thought was a substantial asset can look a lot less attractive. You most likely have questions like:
The quick answer is RISK! Anything in your note that creates additional risk reduces its value. Throughout this article, I will try and lay out a short guide to the risk involved and explain what can affect the note's value. Throughout this article, the terms "note" or "mortgage" will describe various financial debt obligations. These debt obligations or notes have different terms or jargon used to describe them. These additional terms could consist of the following: Note, Mortgage, Promissory Note, Deed of Trust, Contract for Deed, loan, or Note Mortgage ETC. Additionally, throughout this article, the notes being sold generally will be "seller originated notes" or loan created outside of the traditional financial institutions. Your note is your "Personal Property" and can be sold at any time. Note sells, assignments, or transfers are performed very commonly by financial institutions but are less common when done outside of these traditional and bank environments. Below you will find 5 of the main topic that can affect your loans value. To keep things very simple, the closer your note is to traditional bank institutional originated notes and performing the HIGHER, the value of your note will be. The more origination, performance, servicing, and market issues you have, the LOWER the value of your note. Let's jump into a few topics in greater detail! If you have read this far, you must be very interested in selling your mortgage. It's about time to place your mind into the shoes of a note buyer. What does a note buyer want to see? What changes his opinion of value or offer?
The short answer is everything about the note. Forming a value on a loan and determining the market value is not an easy task, and it takes into account a wide variety of factors. As it stands today, your loan generally will go two different directions. Your loan will either be designated as an "A" grade paper, or it's geared towards a small to a medium-sized investor who will purchase it. The values will swing significantly. The best thing you can do to keep your note's value is to originate a high-quality loan (see How to Originate The Most Profitable Note), service your loan correctly, and have all your documentation organized. All the other factors you have no real control over. When it comes to approaching a Note Buyer, it is helpful to know what they are looking for. The following are a few of the key categories you will be asked about, and their condition will ultimately determine the value of your note. If you are thinking about selling your property with owner carry back financing, you will want to create the most profitable and marketable loan possible, just if you ever need to sell your note. A lot of the information in this article is my personal opinion. If another note buyer is asked their opinion, they most certainly will have a different view than I do. The key theme you will see in this article is to keep the interest rate high, get a down payment at the purchase, and keep the balloon short (see my disclosure below), but not too short. Personally, my preference is what I call the 10; 10; 10: get a 10% down payment, charge a 10% interest rate, and set a 10-year balloon (15-20 year amortization would be best, but a 30-year amortization is acceptable).
Contained in this article is my personal opinion for note structures. I am not your attorney or CPA; please seek counsel before making a decision you will have to live with for the mortgage life. The laws in your state could differ, and there is a great deal of consumer mortgage law that could apply or change the loan's decision/structure. You must take great care in forming your opinion on how to originate best your seller-financed note. Don't let personal feelings hurt or hinder you for 20+ years. You could quickly be dealing with a HUGE problem for 20 years if you do not originate from your loan property and under reasonable terms. Can you imagine having to call and collect a late mortgage payment for 360 months!! I hope you find this article helpful and informative. Below are my six categories you need to consider. Let's get started! |
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