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Overview
Different Ways to Sell a Note
A
multitude of circumstances can necessitate the sale of a note. For some,
such as a trust or estate wanting to liquidate all its assets for distribution
to the beneficiaries, selling the whole note is the obvious solution. When
someone has a note with a face value, of say, $100,000, and only $30,000
is required for an immediate cash need, part of the note can be sold. (Assuming
the note has an interest rate of 11% with 25 years of payments remaining,
the note holder could sell less than four years of the note to satisfy his
cash need and keep the last 21 years plus of payments.)
Another way to liquidate a note is to sell it in two or three installments
or sell part of the payment stream. Selling a note for one lump sum
usually requires a discount on the note. By selling it in installments,
the note holder can generally receive an amount equal to or greater
than the current note balance..
If I Sell
Part of a Note, What Happens in the Event
of a Default or Early Payoff of the Note?
When selling part of a note, the Seller enters into a "Partial Purchase
Agreement" with the Buyer. These agreements take different forms with
different Buyers. We normally allow the note Seller two options upon default:
(1) the Seller can "buy out" our interest in the note based upon
a predetermined declining scale pricing schedule as set out in the Partial
Purchase Agreement, or (2) the Seller can forgo the option to acquire our
interest. In the latter event, we would foreclose the property and receive
out of the proceeds the
How
Do We Determine How Much to Pay For a Note?
Many variables are considered when determining how much we can pay for a note.
These include the terms of the note, i.e., the interest rate, payment amount,
and the length of the note. Rule of thumb: the higher the interest rate and
the shorter the term, the more the note is worth.
Other considerations include the amount of equity in the property, the pay
record, the credit and income of the payor, the condition and location of
the property and whether the property is owner-occupied or a rental. All of
this information is used to determine the risk associated with the note, e.g.,
bad credit indicates greater risk and higher down payment indicates less risk.
Rule of thumb: the lower the risk, the more we can pay for a note.
What
About Closing Costs? Will this Affect the Payor?
We generally pay all closing costs. Mailing the payments to a new address
is the only change for the payor. The note terms stay the same.
Can
We Purchase Notes Secured by Commercial Property?
We purchase notes on all types of real estate, including residential property,
commercial property, unimproved land, and farm and ranch land. Each type of
property has its own type of risk. For example, unimproved land is generally
considered to have high risk because of the limited market for resale. Risks
associated with commercial properties include the time associated with the
resale, the use of building, zoning restrictions and environmental concerns.
In short, we perform a risk evaluation on each note and consider our funding
source in order to determine an offering price.
What
Do I Do Next?
If you are considering selling a note, simply complete the information on
the "Request a Quote" and send to us or simply call us on our toll-free
number. We will evaluate the information you give us, make certain inquiries
to help us determine the risk, and give you quotes based upon possible alternatives.
These can include buying the whole note in one or more payments or buying
only part of the note.
Upon
your acceptance of our offer, certain documentation, including copies of legal
documents, insurance and title policies, will be requested. After completion
of our review, verification of data provided and acquisition of any necessary
title policy and appraisal, the legal documents will be prepared for the transfer
of the note. We can close the transaction in our office, at a title company,
or by mail. Completion of the transaction normally takes 7 to 30 days.
Different Options Available to a Note Holder
Various options are available for the note holders to choose from to meet their specific financial needs. The following example is given to illustrate some of these options:
Example:
Sales Price.................................................. $80,000
Down Payment.............................................. $8,000
First lien, 10%, 20 yrs, $694.82/mo..................$72,000
Number of payments made.....................................24
Number of payments remaining..............................216
Current loan balance......................................$69,492
1.
Sell entire note:
Note holder receives a lump sum payment of $60,700.
2. Sell the next 7 years (84 payments) of the note:
Note holder receives a payment of $38,600 at closing. After the investor receives
the 84 payments, the note holder will receive the remaining 130 payment of
$694.82.
3.
Sell the entire note with split funding:
Part now and part at the end of 108 months (remaining 216 payments split in
two equal segments of 108 payments in each. Note holder could select a different
option, e.g., 84 and 132 payments in each. However, amount of cash distributions
would necessarily vary as number of payments vary.)
Note holder receives $45,200 now and $45,200 in 108 months-total of $90,400 for a note with a principal balance of $69,492.
4.
Sell part of each payment:
The monthly payment is $694.82. Note holder sells payment stream of $400.00
per month and retains $294.82 per month.
Note holder receives a lump sum payment of $34,800, plus continues to receive
monthly payments of $294.82 for 216 months.
The above represent only some of the options available. We seek to structure the acquisition of a note to best suit the individual financial needs of the note holder. Call us to find out what options are available to you.
The amounts shown are for illustration purposes only. Actual amounts will vary based upon market conditions at the time of the sale, the terms of the note and with the risks associated with the specific note.
