Most folks would prefer a full cash offer when selling their property, but that’s not always possible. Various factors can make it hard for buyers to get bank financing, so you may have decided that offering seller-financing was the best way to facilitate the sale of your property.

It’s likely you were told that the note you carried back could be sold for a lump sum in the future should you ever decide to cash out. If you’re reading this article, then you might be wondering if now is the right time to sell your note. Common questions surrounding this thought process include …

How much am I going to get for my note?

Should I be concerned about what the traditional real estate market is doing?

Does the stock market factor in to the equation?

What are the odds that my borrower will stop paying in an economic downturn?

These are all valid questions to ask, and there are many more questions that will likely come to mind.

When it’s all said and done, you want to get the most money you can for your mortgage note. Sure, it’s been great getting that payment every month, but the deposits are pretty small and tend to just get absorbed into your monthly budget. What could you do with a lump sum of cash today instead of waiting years to realize the note’s full value?

Is now the right time to sell your note?

We recommend you start to answer this question by asking two more questions …

What would I do with the money?

You might be receiving $500 a month from the borrower, but that amount and timing doesn’t really work when you’re facing a $20,000 bill for college tuition, medical expenses, or income and property taxes.

You might want the money for that well-deserved vacation, to update your home, or to take advantage of a great investment opportunity.

The decision really just comes down to setting personal priorities. We have seen people sell notes for countless reasons.

If you do decide to sell your note, just be sure you’re prepared to meet your budget without that monthly cash flow. The benefit of having that lump sum of cash now can often far outweigh the benefit of having the small cash flow over time.

What is my note worth?

Your note’s value is based on a number of factors. Every note is unique and must be evaluated individually.

The note’s interest rate (face rate), the current value of the property, the amount still owed on the note, the buyer’s credit score, and how long they have been making payments can all impact the fair market value of a note.

The borrower’s payment “track record” is very important to a note investor trying to determine the risks of purchasing your note. If the note has been “seasoned” for two or more years without any missed or seriously late payments, then the investor will be able to offer a higher price than they might if the payment history was spotty. Seasoning on a note is great … especially if you can provide proof that the payments have been made reliably and on time.

The more equity in the deal the better. Equity is the difference between the current market value of the property and the remaining balance on the loan. The likelihood of a buyer defaulting on a note goes down as the equity in the property goes up. Even if the buyer stops making payments in the future due to some unforeseen circumstances, the high equity serves as protection for the investor’s exposure in the note.

Here’s a quick example of the benefits of equity in a note sale. Suppose the current value of the property is $175,000, but the buyer only owes $125,000 on the note. This $50,000 difference, the equity, belongs to the buyer who must continue to make their monthly payments in order to protect this unrealized gain. Should they decide (or be forced) to sell the property, they would simply pay off the note and pocket the $50,000 equity. Whether the buyer “stays and pays” or “sells and leaves” is of no real concern to the investor since their investment is secured to a large extent by this equity.

The buyer’s credit worthiness will also impact the value of your note. If they’ve been good at paying each month, then that’s usually a good indication they have a decent credit score. The investor will determine this by pulling a credit report during their due diligence. Even if the credit score comes back lower than you’d like, remember that it’s only one of the factors used to set the offer price.

So, is now a good time to sell your note?

• Do you have a need or a want?
• Did you write the note at a good interest rate?
• Do you have some “seasoning” on the note?
• Is there some equity in the property?

If you can answer ‘yes’ to the first question, then our recommendation is to not worry so much about the rest. There’s never a charge to find out the fair market value of your note. Go online or give us a call to request a no-obligation quote.

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