Real estate notes can be a great investment vehicle when sellers finance the sale of a property. But sometimes circumstances change, and selling the note becomes the better option.
If you find yourself holding a real estate note that you want to offload, you have three main paths for monetizing it: sell to a specialized note-buying company, sell to an individual investor actively buying notes, or put the note up for auction and let buyers bid on it.
This article will explore the pros, cons, and process of each method to help you make an informed decision on how to best sell your note.
What is a Real Estate Note?
A real estate note—which you may also hear called a mortgage note or seller financing note—represents the financing agreement you provide as the seller to the buyer of your property.
Instead of the buyer getting a traditional mortgage from a bank, you act as the lender. You allow the buyer to pay you over several years until the note is paid off.
Specifically, your real estate note lays out the legally binding loan terms between you and the buyer. This includes details like the
- repayment schedule
- interest rate
- the total amount owed, and
- what happens if the buyer defaults.
As the note holder, you receive monthly principal and interest payments, just like a bank would. The note is secured by the property itself. If the buyer stops making payments, you can foreclose.
Holding a real estate note can provide great returns. But sometimes, selling a real estate note for immediate cash makes more financial sense for your situation. This article covers different options for selling.
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Options for Cashing in Your Real Estate Note
Here are the best three options to sell your real estate note:
#1 Sell to a Note Buying Company
If you want to sell your real estate notes quickly and easily without finding an individual buyer, your best option may be to work with a specialized company that purchases real estate or mortgage notes. These businesses exist solely to buy real estate debt at a discounted price that still offers the note holder a good return.
To find potential note-buying companies, you’ll want to do some upfront research. Search online for terms like “sell my mortgage note” or “companies that buy real estate notes.” Vet any potential companies thoroughly and read reviews before selecting who to contact. Some key things you’ll want to investigate are:
- How long they’ve been in business buying notes
- What types of notes do they specialize in
- What their process entails
- How do they determine purchase offers
- Any fees you may incur
Once you’ve identified one or more reputable companies, you can reach out and receive quotes for your specific note. They will evaluate details like the principal balance remaining and the property as collateral. Most companies will offer a cash offer representing a percentage of the principal payments still owed.
If you accept an offer, the company handles the remaining payments and collections from the original note buyer. Carefully weigh an offer against what you might recoup, selling the debt elsewhere or holding the note yourself.
#2 Sell the Note to an Individual Investor
Selling your real estate note directly to an individual investor is another option. The benefit here is you open up the potential buyer pool beyond just note-buying companies. With some effort, you may find an investor willing to pay you a higher percentage closer to the note’s total remaining value.
To find potential individual note buyers, you have several avenues to pursue:
- Note listing services: Look for specialized platforms that allow you to create a detailed listing for your note for investors to view. Typically, you only pay a small listing fee if it results in a sale.
- Direct marketing: You can market the note yourself through methods like posting in specialized real estate or investor forums, running ads, or leveraging your own network.
- Note brokers: Brokers represent both buyers and sellers of existing debt. They have access to networks of vetted, accredited investors looking to purchase real estate notes for income. Brokers charge a commission if they connect you to a buyer.
Vetting individual investors is crucial before finalizing a sale. Confirm that a potential buyer has the resources and knowledge to manage the note properly.
In addition, compare multiple bids and negotiate the best offer price and terms that meet your goals. With the right buyer, selling directly to an individual can put more cash in your pocket. But it involves more time and effort than other options.
#3 Auction the Note
Putting your real estate note up for auction can maximize the final sale price. It opens bidding to many qualified investors and note-buying companies. With competitive bidding, an auction can potentially result in a higher return than you may receive from direct offers.
A few reputable auction platforms specialize in marketable real estate notes. These platforms manage the entire process on your behalf:
- Initial asset evaluation and listing preparation
- Marketing to generate buyer interest
- Vetting bidders and managing the bidding process
- Collecting funds and transferring ownership of the note
Typically, the auction company charges you both listing fees upfront and a commission based on the final sale price. So, your net proceeds depend partly on how aggressively buyers bid.
The significant benefit of auctioning a note is the open competition tends to increase the price. However, there is no guarantee you’ll receive multiple serious bids. Sometimes, you may only break even or lose money factoring in auction fees. So, it’s generally best suited for larger notes with significant value remaining.
Factors to Consider When Choosing a Sale Method
Deciding the best way to sell your real estate note depends on a few key factors you should assess:
Desired Speed of Sale
If you need to liquidate the note quickly for cash, a direct sale to a buying company may be easier, assuming you receive an acceptable offer price. Sales directly to investors or auctions may require more time marketing the asset.
Maximizing Sale Price
Selling via an auction opens up competitive bidding, which could lead to a higher ultimate sales price. However, you trade off greater certainty on price and timing from direct sales.
Evaluating Offers and Buyers
Scrutinize all bids carefully and vet potential buyers thoroughly before finalizing any sale. Compare on price, fees, the buyer’s capability to manage the payments, and other relevant terms that impact your net proceeds.
Expert Consultation
Unless you have extensive experience valuing and selling real estate notes, consult a financial advisor or note broker to assess options with an objective expert perspective. Fees for professional guidance often result in greater overall returns.
Conclusion
Analyze the pros and cons of your personal situation. Weigh the priorities most important to your goals before picking the optimal path to liquidate and cash in on your real estate note investment.
