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Key takeaways:
When selecting real estate note buyers, it's essential to prioritize reputable firms with proven track records and to ensure they offer fair valuations, transparent processes, and positive client feedback. Doing thorough research and seeking referrals can help in making an informed decision.
Real Estate Notes, also known as Mortgage Notes, are a popular debt-buying instrument in the growing debt market. Whether buying or selling the note, having the right party to make the deal is crucial in real estate. It can benefit both through sustainable growth. That’s why it is often recommended to choose a debt buyer with a mutual commitment to the same compliance standards as yours.
This blog sheds light on choosing the right real estate note buyer and identifying the pool of buyers. Also, it takes you through the process of debt buying and selling.
What is a Mortgage Note: A mortgage is a note drawn between a borrower or real estate buyer and a lender or the real estate property seller. Sometimes, the property seller and money lender can be two different parties. When both parties sign a legal document secured by real estate for agreed terms and conditions, the ‘Mortgage Note’ gets issued.
Unlike traditional mortgage notes, lent by banks, private real estate notes are owned by non-banking private entities, land sellers, or investors. Such notes are typically bought to avoid the time-consuming process of traditional notes. Besides, traditional loan and mortgage note methods may not be accessible to all borrowers. That’s when private real estate notes rescue mortgagors in need.
The decision to keep the note for regular payment collection or sell it for a lump sum solely lies with the owner. However, when the owner decides to sell the real estate note, the exchange value of the mortgage note can vary depending on various factors such as:
The buyer may lower the amount wherever necessary based on the above factors. However, despite the lowered amount, the seller can benefit from the amount recovered.
To buy a real estate note, companies may require state licenses and follow the due diligence. Real Estate debt buyers can have a wide bracket, e.g., entities with a budget of around $50,000 investment fund per year or companies with larger capital requirements. If one has the right direction with note buying, it can turn into their profile's most profitable debt investment.
There are two types of debt with further subtypes. (1) Residential Notes - Performing/Non-Performing (2) Commercial Notes - Performing/Non-Performing The non-performing residential mortgage is the most sought-after among the rest. Although the debt investment recovery may not be guaranteed, the possible mortgage ownership drives debt-buying companies to invest in real estate notes.
For such debt notes, private investors, including small and medium enterprises, are often found to be more interested.
Real estate notes are apparently the most popular investment form in the debt-buying market. Since such debt investment comes with real estate security, it appears attractive despite the minimal regulation by third-party authorities.
Profit through performing mortgage notes: Buying a performing mortgage note is always a safe bet! The investor is assured of investment recovery and regular ROI through higher interest rates. These rates typically range from 7-10% for long-term loans. On the other hand, the rates for short-term loans can go as high as 13-15%. Besides, if the borrower refinances, the note owner can have a lump-sum amount in hand with early pay-offs.
Profit through non-performing mortgage notes: While it may seem that non-performing real estate notes are risky, they are highly demanded in the debt market. Non-performing real estate notes hold higher return potential. When borrowers default, buyers can foreclose on the properties and ultimately gain possession of the same. With this, buyers can leverage the note as most properties bought through mortgage notes can be owned with a significant discount.
Comparing profits with other investments: Real Estate notes gain an advantage of mortgage security compared with other debt investments such as medical or judgment debt. Not only the lower risk associated with the mortgage note excites investors, but less regulation makes their market entry easier.
The risk appetite of businesses or private entities primarily persuades their note-selling decisions. Issuing or selling a real estate note at the right time in investment can help companies make the most of their ROIs.
Mortgage notes are sold when:
Although the reasons above are famous among mortgage note sellers, getting the company free from potential bankruptcy of the payor or mortgage value devaluation are the underlying factors that push them to sell the note.
It may seem that once the buyer is found, the burden of the mortgage note is taken off. However, it is not that simple if you don’t have a credible debt buyer. And hence, companies should always be careful when selling their real estate notes and choosing buyers.
Also, as a mortgage note seller, you come across different types of debt buyers, including individual investors, businesses, and institutions. Most companies prefer making deals with private businesses and institutions rather than individual investors.
Below are some key points to be taken into account before choosing your mortgage note buyer:
First and second mortgage notes:
The primary lien on the property is known as the first mortgage note. Such note credit holds more weightage, and when paying off the amount, it is preferred over all other liens, even in cases of defaults. Hence, investing in a first mortgage note is often a secure option. Especially if you’re interested in non-performing mortgage notes, first mortgage notes can benefit you the most.
On the other hand, the second mortgage note subordinates the first one with low weightage. Typically, these notes have low amounts and high interest. One should be careful when investing in second mortgage notes. You can take a risk if it’s a performing note with a good borrower credit history.
Performing and non-performing mortgage notes
As the name suggests, performing notes are the ones having timely repayment intervals and vice versa with non-mortgage notes. Both types have their advantages and disadvantages. It depends on the buyer’s risk profile and intent while deciding on the debt investment.
You can choose a non-performing mortgage note if the market value of the mortgage is high or if you’re interested in owning the property. In the case of performing mortgage notes, it’s an investment that gives you a regular collection and returns on investment.
Land Contracts
With land contracts, the ownership of the property remains with the seller until the full amount of the property is paid off. Therefore, the borrower does not need a good credit history to make the contract. When you buy a land contract, you become the property owner and receive a regular collection of payments from the borrower.
If there’s a default, all the payments made to you will be forfeited by the borrower. Meaning not only do you own the property, but you also get additional payments made until the default point.
Chattel Mortgages
A movable manufacturing structure such as a house, office, etc is called chattel. Chattel mortgages are better known for cheap real estate investments. Chattel Mortgages are promissory notes financed for mobile or manufactured properties. In such cases, the funds are taken for mobile property parts. In defaults, the note holder or the debt buyer can sell the chattel to recover the note amount.
The process of selling notes can take about a month or more. However, with the help of the right platform, you can streamline it with reduced time. Following are the walkthrough steps while selling your mortgage note.
Step 1: Analyze your portfolio: Gather all the information about your real estate note and the borrower. Know the amount of money you need and the potential value of your portfolio in the market.
When you do it through DebExpert: The team analyzes your portfolio and helps you get the highest possible price for your debt.
Step 2: Set up an Auction: List your portfolio for sale and reach out to licensed mortgage note buyers through different channels and platforms. Prepare for an auction for note sale.
When you do it through DebExpert: The team leads you through the auction setup process. It suggests a suitable auction type while guiding you with portfolio segregation.
Step 3: Bids from Debt Buyers: A lot goes in while setting up an auction. Follow up with respective coordinators for the auction discussion. Once it is done, debt buyers bid for your debt portfolio. Note and compare all bids and prices, and shortlist the best ones.
When you do it through DebExpert: The platform widens the debt buyer pool, where hundreds of listed debt-buying companies bid on your portfolio. The platform makes a transparent and streamlined medium for further communication with shortlisted debt buyers.
Step 4: Prepare a contract: Finally, when you choose your debt buying company, discuss or negotiate the contract terms before making the deal. The most important part- finalize the contract only after both parties are on common ground.
When you do it through DebExpert: With its end-to-end services, the team directs you through all the negotiations, discussions, and contract preparation. It eventually makes the due diligence a hassle-free experience.
With DebExpert, this process can take about 15-28 days to complete. While it depends on your location and other factors, the team minimizes the time and smoothly transfers your real estate note to the best mortgage buyer.
Experienced Manager with a demonstrated history of working in the Fintech/Customer services/Debt Collections industry. Skilled in Management, Debt Collections Sales, Leadership, Team Management, and Public Speaking. Strong operations professional graduated from Madhurai Kamraj University.
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