WHAT IS A NOTE AND HOW DO I SELL IT?
What is a Real Estate Note?
A real estate receivable is a document (or documents) secured by real estate that obligates one individual or company to make payment(s) to another individual or company. These receivables are created when a piece of real estate, such as a house, is sold. The purchaser gives the seller a cash down payment and the balance is paid to the seller in periodic, usually monthly, installments. Therefore, payments are made from the property purchaser (payor) to the property seller (payee). In these transactions, the property seller is simply deferring to the future a portion of the purchase price not paid at closing. It is clear then that these transactions are not loans. The entire transaction involves no third party bank or other lender and no money is exchanged for the unpaid purchase price. Historically this was called seller-financing or owner-financing, but some people now prefer to refer to these transactions as "installment sales" to further distinguish them from loans. The legal documents that accomplish these tasks generally take one of three different forms: Promissory Note & Deed of Trust, Promissory Note & Mortgage, or Real Estate Contract (aka Contract For Deed, Land Sales Contract). The generic term for each of these is a Real Estate Receivable. For convenience, we refer to all real estate receivables as "notes." The payments a property seller will receive from these notes are an asset and like any other asset can be sold for a lump sum of cash.
Why would I want to sell my future payments?
There are perhaps as many reasons people sell their notes as there are ways to spend money. We always ask note sellers why they wish to sell their note. The most frequent responses we get are: 1. To eliminate the risk and responsibility in holding the note; 2. To achieve liquidity; 3. To take advantage of other investment opportunities; 4. To pay off debts; and, 5. To make specific purchases. Often people never wanted to carry back a note in the first place but had to in order to sell their property. Other situations, such as notes provided as equity settlements in divorce cases, inherited notes, to name just two, often result in the current note holder owning a note they never wanted. Often these people are happy to receive the current value of their note in cash and move on with their lives.
For a more detailed discussion on why people sell their notes, follow this link for an exerpt from the Note Holder's Handbook.
Why is there a discount?
The most obvious question people ask us is "What is my note worth"? Or, "How much money can I get for my note"? Unfortunately, the answers to these questions are not easy. Basically, when future payments are sold for immediate cash the current balance is sold at a discount. There are two reasons for this: The balance of the loan is paid back to the payee over time--and time erodes the value of money; and, the stated interest rate on seller-financed notes is not high enough to induce investors to purchase them. Why? Because there is a lot of risk in holding these notes. Therefore, to increase the yield to investors in order to compensate for the risk, you must sell the future payments at a rate of return greater than the note rate. You do that by selling the note at a discount from its current principal balance. This is true for anyone selling a note whether it is a private note holder, Cascade Funding, Inc., or even the government.
How much cash can I get today for my note (i.e., what is my note worth)?
The amount of cash a note can be sold for depends on the current economic environment, the terms of the note (payment amount, interest rate, length of payback, etc.), and the probability that the note holder will lose his/her money (degree of risk). The prevailing economic environment influences the yield or rate of return an investor requires when purchasing a note. In general, the better the economy, the lower the cost of funds for the investor, and, therefore, the lower the yield required on the investment. Currently (April 2019), the economic environment is still one of slow, consistent growth; however, interest rates remain at historic lows (but are beginning to move higher!). Today's low interest rate environment means more cash now for note sellers than ever before--and perhaps, more than will ever be paid in the future. We must examine the terms of the note and the degree of risk individually for each note offered for our purchase. Many people would like us to quote a fixed percentage of the remaining balance on their note. This is not possible due to the large variability in these two components. However, in most cases, we can evaluate all three of the above components and make a cash offer for your note while still on the initial telephone conversation.
Can I sell just part of my note if I don't need all of my cash now?
Yes, in fact this is very common. It is referred to as a "partial purchase" and involves selling only a certain number of the remaining payments on your note. At Cascade Funding, Inc., we can purchase any number of the remaining payments in almost any manner you can think of. For example, let's say you have a note with a balance of $80,000 payable in 240 monthly installments. If you needed just $20,000 now for whatever reason, we would calculate how many payments we would need to purchase to provide you with that specific amount of cash. Precisely which payments we purchase depends on your personal financial situation. Here's a few of the options we could look at for you:
We could buy (Numbers are for illustration only):
A certain number of the beginning payments on the note. For example, we might purchase the first 60 payments and you would receive the final 180 payments.
A certain percentage of each of the remaining 240 payments on the note. For example, we might purchase 50% of each of the 240 payments. You also would receive 50% of each of the 240 payments.
Remember, the above options will provide you with the $20,000 needed today. The type of partial purchase chosen will depend entirely on your unique financial situation. In other words, you may choose the first option if you need $20,000 today and want or need to have a future monthly cash flow beginning in 5 years; and you might choose the last option if you need $20,000 today and also want or need the monthly 50% payment for the next 20 years.
There are many other ways we can structure the partial purchase for you. Our goal is to get you the specific amount of cash you need NOW while also addressing your financial concerns of the future. A real estate note is a remarkable asset when you can intelligently sell your payments to an investor able to provide you with such a rich variety of possibilities.
How long will it take before I have my money?
We have purchased notes in as little as one day; and it has taken over a year to purchase others. On average, it takes two to four weeks. If the sale of your property and the creation of the note was "typical" then you should have your money within two to four weeks.
What is the process, i.e., how does it all work?
We will take an assignment of the security instrument (Deed of Trust or Mortgage) and receive an endorsement of the promissory note. These are the final steps in selling your note however. Before we get to this point we have to do our due diligence. That is, we need to verify all aspects of the transaction. You need not be concerned with not knowing what to do since we do all of the work-- from verifying all aspects of the deal to preparing and having recorded all of the necessary documents to make the change.
For a more detailed discussion on the above topics and more information on seller-financing, check out the NOTE HOLDER'S HANDBOOK.