Unsophisticated real estate investors might find the buying and selling of private mortgage notes a bit intimidating. After all, you become the bank and must have the ability to execute a long-term strategy in some cases while keeping liquidity options available for short-term needs. That’s right, mortgage notes are a niche that often quickly move from long-term financial goals to short-term movements. How to buy and sell mortgage notes in NY is mastered with patience.
Why Hold Notes?
Holding mortgage notes provides real estate investors a big-ticket asset that pays a consistent payment. The rates are higher than traditional bank rates because the property owner often can’t qualify for traditional financing. The risk is transferred to the private lender who can charge more based on NY usury laws. The terms generally include a high down payment with a payoff period of five to seven years. This gives note holders a large equity position on property that they can foreclose on if the payments become delinquent.
Why Sell Notes?
There are times where a mortgage note holder seeks to sell the note on the secondary market. Private mortgage note holders might decide to liquidate the note to access capital for a bigger deal or business venture. The seller may also become concerned about the duration of the note perhaps dealing with personal cash flow issues resulting from divorce, college planning or health issues. It is possible that the note holder has died and the asset is being divided as part of a family estate liquidation.
Finding Mortgage Notes
Since the notes are held privately, it is challenging to find notes to purchase. There are several methods that investors use to develop a pipeline of potential investments. Investors might advertise on public ad locations such as Craigslist or newspaper personals inviting calls for anyone seeking to sell a mortgage note. There are private lenders who provide mortgage notes who might be interested in liquidating part of their portfolio to free up cash. Real estate investment clubs and real estate agents are other resources that might have connections for those who have private mortgage notes.
Pricing the Investment
Private mortgage notes are priced based on the current home value, remaining terms and the determined risk. So the note has terms that are not changeable; the property owner is not going to refinance the loan with you. You are assuming the note at a discount. Therefore a property that sold for $200,000 with a $40,000 down payment (20%) has $160,000 note with a 10% interest rate.
Generally, the risk involved means the note buyer will get the note for anywhere from 50 to 97 cents on the dollar. Obviously the higher risk, the deeper the discount. The risk includes the property buyer’s credit history, payment history and housing market. This means if there is $100,000 left on a high-risk note, the buyer might offer $50,000 to the seller to liquidate.
Creating the Marketplace
Sellers don’t want to rely on one offer for a private mortgage note. Consider private lenders and real estate investment clubs to shop the sale around. By doing this, you’ll be able to determine both high and low offers for the note and get a true idea of the note’s value. Remember that you need to liquidate will also establish timelines that could negatively impact the ultimate sale price of the note. This works similarly to needing to liquidate a property quickly; you might not get the biggest number you want but you get cash quickly.