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Real Estate Private Note Investing – How does it Work?

 Great Returns with Private Note Investing

One of the best kept secrets in real estate investing is clearly the practice of Private Note Investing. While purchasing or investing on notes which are also known as home mortgages, many homeowners think it is like a complicated process. But it really is not that complex because once you take the time to understand how it works, it will be very easy for you to get involved and sell your property smoothly. Also, another good angle of this transaction is that you can set yourself up to be the note broker and still able to make money for simply brokering the sale of a note from the seller to the buyer without even touching your own savings and investments to finish the whole deal, that by itself is a great return on your time and expertise. If you have cash to invest, you could also buy the note and wait for monthly payments on your invested money, which easily yields you a return 3-5 times what a bank CD pays these days, again not a bad return for learning more about private mortgage notes.

What exactly is a Private Mortgage Note?

A mortgage note is simply put as a mortgage loan which is being secured by a piece of property. A mortgage note can represent a first mortgage, a second mortgage, a land contract, or even a contract for sale. A private mortgage note is a loan on real estate done by a private party instead of banks of lending institutions.

Why are these Mortgage Notes Being Sold?

If you have experience to borrow money on a home, in the form of a mortgage, then you have been the borrower on a note. Most often than not, once you borrow from a bank or home financing, or any lender you will be told that that your mortgage note is now being held by another lender. With this scenario, your payments may stay the same, the terms of the contract will be the same, and however, you need to send your mortgage payments to the other lender instead of the one you originally borrowed from. This usually happens when your lender has sold your mortgage note.

A Simple Example of a Private Note Investing

Let’s say that you took a home mortgage with your bank for $100,000. Your bank then process your mortgage loan and then you start your amortization payments on the property. Soon for some reason you are informed that you need to forward your payments to a new bank. This scenario happens only because your original bank loaned you $100,000 to be repaid over 30 years, then the new bank offered your bank a payment of $80,000 cash to purchase your mortgage note fast today, from then and there the new bank has the right to ask payments from you hence on over the life of the rest of your loan. This lets your old bank have again a ready $80,000 to be invested again by loaning it to other needful people straightaway rather than sit and wait for your monthly payments.

In addition to the big banks making mortgages and then selling them to other lenders, often people who carry back mortgages on their paid for properties will sell their notes as well. That is called selling a private mortgage note, for the same reason to get back a large discounted cash sum immediately instead of waiting for the monthly payments of the note to come from the property owner. So if you have cash to deploy, investing a one of these private notes by buying it at a discount from the original note holder, will let you invest your money in a note with a great yield returned on your money. Contact us for specifics of a note and the return you could expect, easily making 3-5 times what your bank is paying on CD locked money in this market.

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How to Sell My Mortgage Note?

A lot of people holding a private mortgage note are not fully aware and probably ask themselves often how to sell my mortgage note.

What is a Mortgage Note?

There are a lot of consideration when it comes to this, however, you need to clarify if you actually sure you have a mortgage note. Many people and home owners have misunderstood the process of selling mortgage notes.

Create a Mortgage Note

Some made a mistake of finding a mortgage note buyer when they do not have the mortgage note in their hands yet. To put this simply is that, most people who own a property or a house are not aware that selling them the property to relieve them of the mortgage payments is the same idea of selling a mortgage note. That is not the case. This is not what a note buyer does.

A note buyer will be interested to buy your note if you are selling mortgage notes, but only if you have actually created a note.

How Does it Work?

This is a good example to give a clearer scenario. Considering you have a property, a house.  One day you decide that you want to sell it on land contract or other creative seller financing method. Then you find a buyer who then moves in the house.  There is no bank actions involved this is due to you becoming the bank by carrying the note.

So, you then create a note between you and the buyer. This type of note is structured so that the person making payments on the note (the person buying the home) will be making his payments directly to you. No bank involved. With this scenario you are holding a note that you can sell to a note buyer.

What is the Key To Selling My Mortgage Note?

Let’s say you are considering selling your mortgage note, here are a few factors that you should be aware of.

First, it is a normal situation that the note buyer will go ask for a discount on your note to buy it because there must be a potential profit in it for them.

Usually discounts will depend on several factors.

What is the Risk of Default?

If the case is like this; the person who is making the payments on the note has a poor credit, there will be a higher risk of default. And since the note buyer assumes the risk of note payment default after purchasing it from you, they will definitely ask for a steeper discount to buy your note.

On the other hand, if your note has generated a steady history of good payments and the payor on the note has a less risk of defaulting, then there is a possibility that you can get more for your note.

One fact of life is that money today definitely has bigger worth than money tomorrow for the simple reason that the purchasing power of money always goes down over time.

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Safekeeping the Original Mortgage Note

Can you easily locate the original mortgage note?

This important legal document should be kept in a safe place, and here is why!

The promissory note is a promise to pay or IOU from the property buyer. It spells out the amount due and terms of repayment. In legal jargon it is known as a negotiable instrument. Similar to a check, the original must be presented to collect or prove ownership.

If the seller desires to sell and assign the payments to a note buyer, the investor will ask for the original note to be provided at closing. The promissory note is then endorsed over to the investor. Similar to endorsing a check, the holder signs on the back of the note.

Sample Note Endorsement on Back of Original Mortgage Note

Pay to the order of, (Insert name of investor), without recourse.

 

Dated this ____ day of _______, 2011.

(Seller Signs and Dates)

Sometimes the note endorsement is executed on a separate piece of paper, also called an allonge. The allonge is then attached as a permanent rider to the original note. The endorsement enables the investor to prove they are a holder in due course, with the same rights of repayment as the original note holder.

An investor may also ask for the original recorded mortgage or deed of trust at closing. However, if this original is lost, an investor will usually accept a certified copy from the county recorder’s office.

A lost original note, on the other hand, can cause a problem. In most states the note is not recorded. If the original note becomes lost a note investor may ask for a duplicate or replacement note to be signed by the payer or maker. This means going back to the person that owes you money and asking them to resign. This relies on their cooperation and can cause delays.

The investor will also ask for a lost note affidavit from the seller or note holder, stating the note has been lost and it will be presented if found at a later date.

Some investors will consider accepting just the lost note affidavit with a copy of the original note.  However, this is increasingly rare as a lost original note can create problems foreclosing should the buyer stop making payments.

The best option is to avoid losing the note by keeping it in a safe deposit box or a fire and waterproof safe. Some sellers elect to have the original held by their attorney or a third party servicing agent for safekeeping.

Whatever method you choose, be sure to keep the original mortgage note in a safe place that is easily located!

 

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Can I Sell Part of My Mortgage Note?

Owner Financing doesn’t have to mean waiting years or decades to receive money.

Sellers have the choice to sell all or just part of their future payments for cash today.

Option 1 – When note buyers purchase all the remaining payments on a land contract, mortgage note, or trust deed it is considered a full purchase.

Option 2 – When the note buyer purchases just a portion of the remaining payments it is considered a partial purchase.

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Welcome to Newland Note Investors! We realize that selling your mortgage note can be one of the most important financial decisions you make. We also realize the entire process may seem confusing … [Read More...]

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