So, you have enjoyed the monthly payments from your Note for years, but now you are looking to make a bigger investment and redeploy your capital. How do you go about getting an offer for your Note? What is a good price? What are the steps and how should I prepare?
INTRODUCTION
Many Note holders do not realize there is a large market for the buying and selling of Notes. This market has everyone from large hedge funds to banks to private equity all the way down to individual investors. The challenge you have is who do you work with and how do you get the best price! In this article we go over key steps that will ensure you are prepared and will walk away with the best price on your Note.
PREPARATION
As with any important investment decision, preparation and homework are key! There are easy steps you should go through before looking for offers.
House Inspection – The property is a key item that your buyer will be reviewing. Take some time and drive by the house, observing the current condition, any visible repairs and how the neighborhood is looking. Try to get a good picture of the front of the home and timestamp it.
Amortization and Payments – Take the time to review the amortization of the Note. Make sure you have been updating the amortization after receiving payments and properly adjusting the unpaid balance (UPB). Be ready to share your current UPB when you start the offer process. Remember, every month the UPB will drop so if the offer process takes more than a month, you will need to update. For payments, you will need to provide a verbal update that all payments have been made timely. As part of the closing process, you will need to provide a detailed payment history.
Find original documents – The most important document to find is the original promissory note. At closing, you will be providing this document to the buyer. Other important documents to find are the closing statement, the recorded ownership documents, and any title insurance policies.
Check taxes and insurance – Most Note holders forget this step. Take the time to check the county website and ensure that all property taxes are current. If they are not, reach out to your borrower and get them paid. Make a copy of the current property tax status. As to home insurance, most borrowers are required to insure the property and list you, the lender, on the declaration page. Make sure you have a copy before you start the offer process.
OFFER PROCESS
After completing the preparation steps above, you need to move into the process of getting offers on your Note. The steps below are standard for most offers on Notes.
Locate Buyer-As mentioned earlier, there is a large market for Notes. Who do you approach to buy your Note? Some buyers, like hedge funds, buy multiple Notes at the same time from banks or federal agencies like Freddie Mac and Fannie Mae. You need to find buyers that are interested in working with individual sellers. There are numerous buyers out there, so be careful and do your homework. We recommend using brokers who specialize in putting buyers and sellers together. Brokers will have experience and can work for you through the entire process.
Get Offers – Once you find potential buyers, you will need to provide all the preparation materials. The more complete a package provided will get the best offers. Depending on the buyer, they may have an online portal, a paper form or require a phone call. Most reputable buyers will get back to you with an offer or will let you know why they are not interested. Every buyer is a little different, but most will provide both a full and a partial offer.
Full Offer– A full offer is for all remaining payments. They will provide both an offer amount and the start date for collecting payments. Often, they will reference their estimate of property value and the borrowers’ credit rating. A full offer is normally the highest type of offer and will relieve you of all obligations after closing.
Partial Offer– A partial offer is for a certain number of the remaining payments (i.e. next 100 out of the 200 remaining payments). After the partial period is over, the borrower will start sending payments back to you. A partial offer is always less than a Full offer but does allow you to get a lump sum of cash now and then restart monthly payments in the future.
Closing Costs – When you receive your offer, pay close attention to closing costs. If the buyer is paying closing costs, the offer will be referred to as a Net Offer. If the buyer asks you to pay closing costs, the offer will be referred to as a Gross Offer. The Gross Offer may sound larger than a Net Offer, but you must remember that closing costs must be removed from a Gross Offer before comparing it to a Net Offer.
Purchase Agreement – After agreeing on a price, the Purchase Agreement will be created to document the offer price and some basic terms for both the Seller and Buyer to review and sign. Please remember, verbal agreements are not legally enforceable, so always document an offer and fully execute. All Purchase Agreements will reference language like “the purchase price is subject to change after due diligence.” This clause allows the Buyer to alter the price based on discovery of something different than the original assumptions made in the offer. (Note-Some buyers may refer to the Purchase Agreement as a Commitment to Purchase or Letter of Intent (LOI)).
Price – Ultimately, you will get a price for your Note. The offer can be stated as a set price or as a % of the current UPB. The offer amount will always be less than the current UPB (often referred to as the discount). For more insight about pricing, please refer to the following articles that explains how Notes are valued (How to set-up your Note to ensure success and maximize future value! or Understanding the Value of a Seller-Financed Note).
SUMMARY
After putting together your preparation items, getting a great offer, and signing your purchase agreement, you have made it through the first part of selling your Note. This process can be quicker or slower depending on the buyer and seller information exchange and the due diligence process.
The normal process ranges from 4 to 8 weeks. The process can vary between buyers and unforeseen issues that may come up. We strongly recommend using a Note broker to help you through the process to help you sell your Note at the highest price and with the least amount of effort on your part!
To learn more about the next step in selling your Note, please check out the following article (How do I sell my Note? (part 2 of 2-Purchase Agreement to Cash in the Bank))
Connect with Peak Notes
Why not set up a meeting with a Peak Notes specialist to discuss selling your Note and getting a top dollar offer! Meetings are brief, cost nothing and can give you more insight into how you can maximize your investment potential!
If your property is located in Florida, please click on this link and set up a meeting with John.
If your property is located outside of Florida, please click on this link and set up a meeting with Karen..
DISCLAIMER-Peak Notes is not an accounting firm or legal firm and the recommendations above are best practices and observations from our years working with Notes. Always consult a licensed professional for both accounting and legal issues.