Mortgage notes are an interesting real estate portfolio holding. Private notes in New York are common among borrowers who might not be eligible for traditional lending channels such as banks and credit unions. Investors like the control of mortgage notes, being able to choose whether to keep the note for an extended period of time or selling it in a secondary market. Selling your New York mortgage note in 4 easy steps gives you cash for the next investment.
Step 1: Define Salability
Whether or not you can sell a private mortgage note is contingent on how much of a down payment was made on the note. These private notes are riskier than traditional bank loans by the very fact that the borrowers in most cases could not qualify for normal bank loans. This means that a private note with no or very little down payment is generally not a salable note.
Generally speaking, a private mortgage note should have at least a 10 percent down payment to be eligible for resale. The other qualification factor is whether a written personal guarantee was made with the original note backed by a trust or other personal assets. This is called recourse. Buyers of mortgage notes seek a recourse clause of the note holder.
If a private note was made when a mortgage holder had a credit score below FICO 520, the reseller might need to wait for the FICO score to improve before reselling the note.
Step 2: Establish Value
Establishing the value of the mortgage note for sale starts with how much down payment was made. The higher the down payment, the more value the note has because there is less long-term risk to the note. The original note must be higher than what traditional banks are offering for similar term mortgages. The higher the yield, the more attractive the note can be to investors. On average, notes will yield anywhere from 4 to 12 percent more than traditional bank notes. Investors are also seeking to be out of the note in a shorter period of time, anywhere from five to 15 years. Each state has its own regulations about the maximum a private lender is allowed to charge for a loan.
Once you have these numbers you can start to price the note based on the assessed risk. Riskier notes might sell for only 50 cents on the dollar. Buyers will purchase the less risky mortgage note at 70 to 85 percent of the loan balance. Low credit risks considered to be A+ Pricing requires higher credit scores, strong payment history and a 20 percent down payment might warrant 86 to 97 percent for the note.
Higher sale prices are rare and sellers should expect to see the note sell at for a wholesale discount. Shopping the note to investors gives the best indication of pricing based on the market conditions and what investors are willing to pay for the mortgage note.
Step 3: Locate Investors
Finding investors can be tricky. Many real estate investment clubs have investors who like these types of investments where they generate cash flow without getting hit hard with taxes. Some banks will consider buying private mortgage notes but do have much higher standards due to federal regulations compared to private investors.
There are other creative ways to find private investors looking to diversify a real estate portfolio with mortgage notes. Large trusts and corporation might find the real estate backed investment attractive because it offers much higher rates than anything found in banks. If the homeowner fails to make the mortgage payments, the delinquent note goes into foreclosure and the investor claims ownership of the property.
Step 4: Complete Paperwork
Buyers will most likely want to have an appraisal made on the property to ensure the value has not flipped from an equity position to an upside-down position. Pull the title and confirm that there are no loan positions that supersede the note. In some cases, when a first position note is refinanced or sold, a second position note becomes the first. Investors will not want to be the second position to a smaller secondary mortgage.
Once all proper documents are gathered including the original note paperwork, complete an assignment. Complete the assignment paperwork, properly executing it in the presence of a notary public. Take the paperwork to the county clerk’s office to record it in public records.