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Seller-Financed Notes 101

Education is Key to Seller Confidence and Satisfaction

It’s been our experience that confused sellers always say no to selling their notes. Who can blame them? We believe that education is the key that gives a note seller confidence to sell as well as a sense of satisfaction when the sale is complete. We’ve compiled here what we believe to be the most important lessons a prospective note seller will want to learn. We welcome your feedback if you feel we’ve left out any important lessons.

There are many reasons that lead someone to sell their seller-financed note. We suspect you’ve already given this question considerable thought before visiting our site. In addition to the obvious advantage of having your cash now instead of later, please consider this short list of additional benefits of selling now.

You’ll get top dollar to sell now. Offer prices are currently above historical averages for quality notes.
You’ll no longer have to deal with the headaches of managing the note (payment collection, insurance and tax monitoring, federal tax reporting requirements, etc.).
You’ll no longer carry the risks inherent in holding notes (borrower default, foreclosure, housing market decline, inflation, etc.).
You’ll free up funds for immediate needs or other investments that you believe will produce a greater return.
Maybe you never really wanted to seller-finance this property in the first place.
Perhaps selling the note is necessary to settle an estate or divorce.

The list of reasons and benefits goes on and on. There’s never been a better time to sell your seller-financed note.

The market value of a private seller-financed note is determined by a number of characteristics unique to the note, the property and the borrower. Because no two notes are exactly alike, each note needs to be priced on an individual basis. We consider a number of factors when evaluating a note for purchase:

Condition and current market value of the property
Equity in the property securing the note (i.e., property value minus balance owed)
Type of property (e.g., residential vs commercial, single-family vs multi-family)
Condition of the property’s title (ownership history, judgments, liens, etc.)
Payment history and current credit worthiness of the borrower
Note terms (unpaid balance, interest rate, payments remaining, special provisions, etc.)
Priority of the debt (i.e., lien position – first, second, etc.)
Size of the down payment made on the property
Current economic and real estate environment (interest rates, market cycle, etc.)
Time value of money (i.e., money is worth more today than next year)

It’s important to understand that each of these factors can introduce specific risks for the note buyer. These risks are reflected in the price the buyer is willing to pay for the note. In reality, seller-financed notes virtually never sell at par (i.e., for the amount owed). They are instead sold at a discount, with the amount of discount determined by these risks along with the buyer’s profit expectations. We will help you to understand how each of these factors, and perhaps others, impact the market value of your seller-financed note.

That’s a great question! While any organization can make claims about their honesty and integrity, only your personal experience matters in the final analysis. Perhaps we can best address this concern by listing a few situations that may give pause for concern. Be wary when ...

The full purchase price offer you receive seems too good to be true. You may be headed for a bait-and-switch experience.
You are given an unreasonable deadline to accept the offer. Typically, an offer should be good until the next payment has been made by the borrower.
You feel pressured into signing the Purchase and Sale Agreement. While this agreement is important and will eventually be required, you should always feel comfortable with the offer price and have all your questions satisfactorily answered before signing.
You are asked to pay any up-front costs. You shouldn’t have to pay costs at all since seller-paid items, if any, are built into the final purchase offer price.
The process seems to stall once the Purchase and Sale Agreement has been signed. You should expect to receive frequent reports on the progress toward closing.
You’ve already received a closing date and then the buyer lowers the price within days of funding. It’s not uncommon for the initial offer price to change based on due diligence findings, but rarely after a closing date has been agreed upon.
You are asked to take a price lower than the original quote without justification for the adjustment. The 3 main reasons the value of a note will go down after the initial price is given are unacceptable borrower credit, a property value lower than expected and/or title defects that cannot be corrected (or that will be expensive to correct).

We at Best Value Notes are committed to fair and ethical business practices. We intend to earn your trust as we guide you through the note sale process.

No. The borrower will continue to make the same monthly payments until the note is paid off, just as they would have done if you still owned the note. Only the address to which the borrower mails their monthly payment checks will change. They will receive detailed instructions by mail at the appropriate time. In some instances, the new lender can offer the borrower additional benefits like credit bureau reporting of on-time payments, property tax and insurance escrow, and convenient online payment methods.

The process of selling a privately-held note involves a series of steps that generally take three to four weeks to complete.

Step 1: You, the note holder, discover Best Value Notes and learn that you can receive cash quickly by selling all or part of your note.
Step 2: You complete the Fast Quote form on our web site which tells us basic information about your note. We will promptly review your submission and let you know what we can offer you for the note. This is our initial offer price based on the information you've provided.
Step 3: Once you’ve agreed on the initial offer price and have all your questions answered, you will enter into a Purchase and Sale Agreement with us for the sale of the note. The agreement will contain the sale price, the number of payments being sold and who will be responsible for the expenses necessary to close the transaction.
Step 4: We will perform our due diligence necessary to complete the transaction. The due diligence process is described in more detail in another question, but basically involves a deeper dive into the note, borrower, property and payment history. We will discuss with you any unanticipated findings that might impact the offer price.
Step 5: When we have completed due diligence, the closing can be scheduled. It is a matter of good business practice for the closing to take place at an attorney’s office or at the title company that completed the title search.
Step 6: At the closing you will sign the closing documents and surrender the original note, mortgage (or trust deed) and all other relevant documents (e.g., original title insurance policy, if one exists).
Step 7: Last but not least, you will receive your sale proceeds from the closing agent via wire transfer or certified check. It is also important for you to request a full set of copies from the closing agent.

These are the typical steps necessary to complete the sale of a mortgage note. Every note is unique and every note sale transaction will be unique as well.

Completing our Fast Quote questionnaire is typically the first step toward receiving your initial purchase quote. It’s important that the information you provide on this questionnaire is as complete and accurate as possible. Gather the following original documents before starting: Settlement Statement (if available), Mortgage (Deed of Trust, Real Estate Contract, etc.), Promissory Note, and borrower payment records/history. In many instances, we can deliver an initial quote based on the Fast Quote information alone. We will contact you by phone or email if additional information is needed.

Important: Please understand that our initial offer is subject to the results of a more thorough due diligence process to follow.

Once you’ve verbally accepted the initial offer and are ready to move forward, we will ask that you sign a Purchase and Sale Agreement (PSA). This agreement binds you for a reasonable time period to sell your note to us for the agreed upon price. You might ask why such an agreement is required. The main reason is that this is the point at which we will start to incur third party due diligence expenses. See the separate explanation of what’s involved in the due diligence phase for more information. As we’re sure you can appreciate, it doesn’t make business sense for us to spend this money without some legal assurance that you are committed to sell us the note. Once the PSA has been signed, we will move into the Due Diligence phase.

After we’ve agreed upon an initial offer price and the Purchase and Sale Agreement has been signed, we will move into the Due Diligence phase. We will review all pertinent documents in more detail, including the promissory note, mortgage, deed of trust or trust deed, and the settlement statement from the original sale of the property. If we haven’t already done so, we will ask that you send us copies of these important documents. Your prompt cooperation will be needed to keep this process moving forward. In addition, we will complete the following tasks and, in some cases, will ask you for supporting documentation.

A credit report on the borrower will be ordered and reviewed.
A detailed payment history review spanning at least the most recent 12 months will be compiled and reviewed. We will ask that you provide us with this payment history along with evidence of when the payments were received. If a third-party servicer is being used to collect payments, then you will simply request a payment history report from the servicer. If you have been self-servicing the note, then we can guide you as you collect and compile the necessary evidence.
We will ask for a copy of the homeowner’s insurance declaration evidencing that the collateral property is insured and that you are named as an additional insured on the policy. If you aren’t currently named on the policy, then you will need to contact the borrower to obtain a copy of this declaration page.
A review of the property tax status will be conducted to confirm that no delinquencies are present.
In most cases, a drive-by appraisal on the collateral property will be ordered and reviewed. Be assured that no one will bother the borrowers or attempt to gain access to the property. This is strictly an external appraisal of the property along with an overview of the housing market in that area.
A title search will be ordered and a commitment for a lender’s policy of title insurance must be issued by the title company. Any title issues that are uncovered will need to be remedied or accepted in writing before closing on the note sale.
An estoppel letter will be sent to the borrower verifying the note terms and the current outstanding balance on the note. This is necessary to help prevent any future dispute raised by the borrower concerning the note details or payment history. In some cases, the borrower may be contacted by phone to verify the details and status of the note.

If no areas of concern are uncovered during the Due Diligence phase, we will move forward to schedule a closing date. However, if unanticipated discoveries are made during due diligence, then we may need to adjust our offer accordingly. The 3 main reasons the value of a note will go down after the initial price is given are unacceptable borrower credit, a property value lower than expected and/or title defects that cannot be fixed (or that will be expensive to fix). We will discuss these problems with you and answer any questions you may have.

The purchase price is paid in guaranteed funds (cashier’s check or wire transfer) upon receipt of the final closing package and original documents. We are happy to wire funds to the attorney’s office or title company so you may exchange your original documents for the proceeds, assuring the safe and secure transfer of your valuable asset. Closing can typically be scheduled in as little as 10-15 days after due diligence has been completed.

No. Although we do purchase and hold some notes in our own portfolio, we also work with volume note buyers and private investors who have chosen to leave the sourcing of these seller-financed notes to us. Rest assured that we vet all of our financial partners to insure they meet our own ethical business standards. The offer price and note sale experience will be the same regardless of whether we or one of our financial partners are ultimately purchasing your note.

A note where the borrower pays consistently late and/or occasionally misses a payment is classified as “sub-performing.” A note where the borrower has stopped paying altogether for a period of time is classified as “nonperforming.” The additional risks assumed when purchasing a sub-performing or nonperforming note warrant a lower offer price determined by the specific payment delinquency facts. If you have a note like this, we are happy to take a look to see if we can make you an offer. We ask that you please be completely forthcoming about the payment history and any other relevant facts concerning the note.