I had a nice older gentleman that I gave him an estimate on the value of a note he gifted recently try and calculate the value I gave him with a calculator. He couldn’t do it and the reason is pretty simple. The best way to explain how note discounting woks is to think of compounding interest and with each future interest earned, the principle is now larger and earns slightly more interest. In the case of compounding interest, time (so you receive larger and larger interest income each period) is on your side. Unfortunately, note discounting works in the opposite way, where time is not on your side as the further out a payment is the lower present value it is. That’s why 30 year amortizations for notes are valued much lower by note buyers than 15 or even 20 years. Think about it. If someone offered you $1,000 today or $2,000, even $3,000 in 30 years, which would you take. I bet you don’t need a sophisticated computer program to answer that. If you have any questions about note selling and buying, feel free to give us a call at 1-877-655-5625. Ask for Ron Stone.
Many people ask me if they selling unseasoned notes is possible. Unfortunately, there is no straight answer to this question, however let me say at the outset that we require at least one payment in order to buy a note due to regulatory issues ( a whole subject by itself). Alright, back to the question of selling a note where only one payment has been made or will be made before closing. The answer is “it depends”. Obviously, you are now asking “depends on what?”. Mostly selling unseasoned notes depends on the perceived risk and the primary elements that determine perceived risk in the case of unseasoned notes or barely seasoned notes is the down payment/equity and credit of the buyer/borrower. This is why it’s so important to check your buyers credit before offering owner financing and also why you should ask for 20% down or more if you want to sell a note shortly after the sale otherwise, depending on those two elements, we may want to see 6 to 12 months of seasoning. However, a good option for many note sellers where credit is decent but not terrific and the down payment is say 10% to 15% is selling a partial. In other words we can usually do a partial purchase (say 36, 48, or 60 months of payments) which can quickly put cash in your hands rather than sell all payments at an increased discount rate. The definition of seasoning is simply how long the buyer/borrower has been making payments. What note buyers are looking for is information that illustrates the buyer is a good risk. I hope this unseasoned notes post was helpful. If you have other note buying and selling questions, give us a call 7 days a week at 1-877-655-5625
A lot of owner financed note holders interested in selling a note, search for the term sell deed of trust or sell mortgage. First to clarify, deed of trusts and mortgages. Both these financial instruments are simply security for a promissory note. As every state can be different when it comes to real estate law, some states call these security agreement a Deed of Trust and some call them a mortgage but they are effectively the same. As to selling a deed of trust or selling a mortgage, in actuality you are selling the income stream from the promissory note, however that note is not secure with out the deed of trust or mortgage so they are sold as a package. You can’t sell one without the other because without the security agreement, your borrower could default and you don’t have the ability to foreclose on the property. If you sell a deed of trust or mortgage without the promissory note you are not receiving any income for your outlay. Of course mortgage note buyers know this and handle the sale accordingly. So if you are looking to sell a note to a real estate note buyer, just realize the deed of trust or mortgage go with the note.