Inevitably, one of the first questions a note seller asks is, “How much will you give me for my note?”

At the end of the day, that is what it’s all about, right? … Or is it?

You might be surprised that there are some other very good reasons why a person might decide to sell their seller-financed note.

For some, selling a note is not just about price.

For many people selling a note is about escaping the headaches of collecting payments every month, dealing with slow-pay or even defaulted borrowers, monitoring property taxes and insurance, sending annual interest statements, or just having their money tied up for such a long time.

Fortunately, there’s good news for note sellers! Whatever your reason for selling, you will be able to leave these “challenging” aspects of owning a note behind … regardless of price.

But, in the end, we agree that price is still an important factor. So, how can you get the most for your seller-financed note when you decide to sell? Here are a few tips that apply for newly-created and existing notes.

Tips For Creating A Marketable Note

Here are a few recommendations for creating the most marketable seller-financed note:

Get the most down-payment you can (10% minimum, 20% is great) – A key component of the note pricing formula is equity – the difference between the current value of the property and the remaining balance on the note. The note buyer’s Loan-to-Value (LTV) ratio is a good indicator of the likelihood the payments will continue without interruption. Sometimes called “skin in the game”, the more equity the payer has, the less likely they will allow the loan to go into default.

Don’t be afraid to charge a healthy interest rate – Investors purchase performing seller-financed notes for one main purpose – to receive a great return on their money. The closer the face (interest) rate of your note is to the going rate of return sought by investors, the less of a discount you’ll be asked to take when selling the note. If you create a note at a very low-interest rate, say 4 percent, you are almost certainly looking at a greater discount in order to sell your note. The “right” interest rate to charge will be determined by the current interest rate environment and the specific details of the sales transactions. At the time of this writing, seller-financed notes with a face rate of from 8.0 to 9.9 percent are considered desirable by investors.

Use a third-party loan servicer – A trustworthy payment history plays a significant role in the investor’s decision to buy or pass on a seller-financed note. We strongly recommend that the loan be placed with a third-party licensed servicer. For a reasonable monthly fee, the servicer will send out statements, collect payments, track the current loan balance, handle any necessary borrower contact, manage the property tax and insurance escrow account, and send out all government-required forms to the borrower. In many cases, the servicing costs can be passed on to the borrower by including this in the note.

Check the buyer’s credit history – How well a buyer has made debt payments in the past is usually a pretty good indicator of how well they will pay you. You certainly don’t want to sell the property only to turn around and get it back through a lengthy (and costly) foreclosure process a few months or years down the road. Resist the urge to “be a nice guy (or gal)” when it comes to sticking to your minimum credit score standard. You may live to regret that decision, either because the loan defaults while you own it or because you have trouble selling the note for top dollar when you’re ready.

Tips For Improving An Existing Note

If you’ve already created the seller-financed note, there are unfortunately some things that can’t be changed. However, there are still a few things you can do to improve the marketability of your note.

Carefully track and document the payment history – If you are not using a licensed third-party servicer to collect payments on the note, make sure you are keeping a photocopy of the checks you receive from your borrower. Keeping an ongoing ledger of payments is also good, but copies of checks and deposit slips are much, much better. We recommend that you never accept cash payments from borrowers since the paper trail is very difficult to substantiate.

Keep original paperwork safe – Make sure you have your original paperwork in a safe place like a fire-proof box or safe deposit box at your bank. When you sold the property, the buyer signed a ‘Promissory Note.’ This is their promise to pay the loan per the agreed-upon terms. The original promissory note (or just “note”) is a necessary document for proving ownership. Typically, the note isn’t recorded with the county which makes it more of a challenge to overcome should the original go missing. In addition to the original note, keep copies of the security document (mortgage, deed of trust), the closing statement, and any other relevant documents together in a safe place.

Keep additional information about the property – When selling a note, any additional information you have about the property is always helpful. For example, did you or the borrower add on a room or improve the property in some way? Do you believe the property has a higher value now than when t was sold? If so, why? Is the property owner-occupied or rented out to tenants? Do you have any recent interior pictures of the property (which you might have taken during a periodic inspection)? Additional information like this can prove useful to the prospective note buyer as they decide on their offer price.

Although selling a note is not always about price, a few relatively simple practices can certainly help you get the most cash possible when you’re ready to sell.

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