It is not a complex process to sell promissory notes to note buyers. The overall process can be hassle-free and smooth when you prepare properly and use an experienced note buying company or a reputable note buyer. As a leader in purchasing promissory notes and loan acquisitions, we have compiled this comprehensive guide to give you a good understanding of all of the essential aspects of "How to Sell a Promissory Note." Let's first lay the foundation with some general background information on promissory notes.
What are Promissory Notes?
A promissory note is a specific agreement between a buyer and a seller, or a borrower and note buyer selling a note, that details a transaction's terms and conditions. It serves as a promise that a borrower (buyer) will follow-through with a specific repayment plan. However, a proper and legal promissory note is not just a basic IOU. When they are properly prepared, they are official financial documents that are completely binding under the local jurisdiction where they were entered into.
A majority of loan agreements such as promissory notes (or mortgage notes) particularly in business loan or real estate transactions, come with a collateral document like a deed of trust, mortgage or chattel mortgage (used with items of personal property), depending on the state that the loan was originated in. The promissory note, in this case, acts as a document that represents the repayment terms for the loan including the amortization period, interest rate, and payment amount, whereas the deed of trust or securing mortgage outlines the collateral that secures the promissory note, such as property law and property under a specific state. Therefore, the two documents comprise the legal debt instrument.
Why Are Promissory Notes Used?
With all of the recent news of mortgage rates increasing, installment, owner-financed, and seller-financed sales of property (commercial and residential) should also increase. When mortgage rates are on the rise, it makes sales hard for both sellers and buyers. Buyers whose credit is less than perfect will look for ways around having to deal with traditional lenders with their strict lending criteria. Also, higher mortgage rates mean there are not many highly-qualified buyers. Sellers can forgo the conventional lending process and use promissory notes for self-financing transactions.
How Do Promissory Notes Work And Who Uses Them?
Buyers - Promissory notes are very beneficial for buyers who are unable to qualify for a traditional mortgage since the seller finances the loan and acts as the bank. The trade-off is that they will be charged a higher interest rate since the seller is assuming a higher risk. The house (or business) acts as the collateral, and the security for the note is the agreed upon downpayment. If the buyer continues to make their agreed payment, then they will continue to own the home. However, if they should default, then the seller can foreclose on, or take the property back.
Sellers – There are numerous reasons why a seller might want to use a promissory note, which is also referred to as carrying back a note. When selling a mortgage, sometimes it is the only choice that is available if they want to sell their property or home quickly. Promissory notes are often used by family members to quickly transfer and sell property, like farmland tracts among siblings. Alternatively, a noteholder might have obtained promissory notes via inheritance or divorce proceedings. A promissory note in some jurisdictions offers the seller some advantage, such as having the ability to transfer ownership of the note quickly or to enforce the note if a borrower should default more readily.
Why Would I Want To Sell A Promissory Note?
Deciding to sell a note to either a note buying company or note buyer is one way that a non-liquid asset can be turned into a liquid asset quickly. Many sellers do not want to take on the risk of carrying a note over the long term and structure a sale to sell the note as soon as possible. Note buying companies and note buyers discount the price on the note to offset the risk based on the loan structure's characteristics. Note sellers generally prefer to have a lump sum of money instead of receiving payments over time so they do not need to wait for 10,20 or 30 years to get all there money.
A note holder may not want the hassle of dealing with the IRS or being responsible for managing the paperwork and records for keeping track of the asset. They may an emergency such as school tuition or medical bills that necessitate that they liquidate the promissory note quickly for cash.
How to Sell Promissory Notes
Several factors are involved in successfully selling a promissory note. If you are planning on selling a business, commercial, or residential note soon, then here are a couple of things for you to consider
Keep Good Records of your note
If a seller wants to sell a promissory note it is important to keep all your paperwork together as they will be need when you want to sell.
Documents You Will To Provide a Note Buyer
- The Original Note and Note Details: Note Amount, Interest Rate and Note Term
- The Security Instrument (Mortgage or Trust Deed)
- Down payment amount (10% or more is best)
- Payment History on the note
- Proof of Property Insurance
- Proof of Title Insurance
They maybe other document required depending on who is going to but the note.
Where Promissory Notes Can Be Sold
Another decision that needs to be considered is deciding whom you will sell your promissory note to. Sometimes individuals will purchase notes, although it can be hard to find people who have enough cash available for these purchases. Individual note buyers frequently lack the knowledge and experience for making efficient deals. Therefore, process with caution. Selling or transferring a promissory note to somebody you know, like a family member, is another option. Finally, a promissory note can be sold to a reputable note buying company that has an established track record of purchasing notes. That is frequently the most seamless and quickest option that is available. Get a referral from your realtor or banker or search for one online.
Getting a Quote on a Promissory Note
To obtain a quote from a note buyer, it will be necessary for you to answer some questions about the property. Be prepared to offer information like the type of property, the value of the property, buyer's credit, buyer's information, amount of the down payment, the number of payments that have been made, and whether or not there are any liens. After supplying this information, the note purchasing company with offer either a full purchase on the remaining balance or a partial purchase on the part of the future payments.
Keep in mind that the amount will not be the total balance on the loan. Typically it will be 65-90% of the total value. The note buyer is assuming the risk on the investment. If you agree to their offer, then the company will ask for the note paperwork and perform an asset verification (verification of the collateral).
Underwriting and Closing Processes on a Promissory Note
After the buyer has received all of the paperwork for the underwriting process, they will perform a title search and do an appraisal as part of the due diligence process. Make sure that the company you are working with is willing to pay for all of the costs that are associated with buying your mortgage assets, including title fees, BPO, and appraisal. After a clear title search is complete, the closing may be scheduled for either in person or via UPS or FedEx (if the seller of the note is out of state). The last step takes place when the seller receives the payment via check or wire transfer. The entire process may take 15 to 35 days, depending on time to appraise, the location of the property, and location of the buyer and seller. Overall, it is a relatively quick process in terms of real estate.
As you can see, "how to sell a promissory note" is quite a loaded question. There is a great deal of knowledge and expertise that is employed to handle all types of promissory notes properly. However, we hope you know you have a basic understanding of how to sell a promissory note. Please contact a note buyer if you want a quote or have any questions.