Mortgage Note Buyers and Sellers, Loan Servicing, and Hard Money Lenders

10 Things to Think About When Creating a Note (Part II)

3.  Documentation Practices

This is where I see a lot of frustration and note sales take a turn for the worse.  The ORIGINAL promissory note is the GOLD in the transaction, The Texas T.  Losing that document can be a very costly mistake and akin to burning cash money.  I have been to a few closings where the note seller does not have the ORIGINAL promissory note and kills the deal altogether.  The signatures should be in blue, but if they are in black you can wet your finger and then rub on the signatures.  If they smear you have the original document, if they don’t then you have a copy.

Now aside from losing the promissory note you can save yourself a lot of pain and anguish if you practice sound record keeping practices.  Keep the original promissory note and all the documents from closing in a safe findable place.  Don’t just shove them in a drawer and forget about them.  These are the documents that will be needed to sell your note

  • Deed of Trust
  • Promissory Note
  • Settlement Statement / HUD 1
  • Buyer Credit Report
  • Warranty Deed
  • Property insurance (hazard)
  • Title Insurance

If you have all these documents at hand this will expedite your transaction significantly, if not then it can drag on for several weeks.

4.  Accounting of the Note

When it is time to sell your note you have to be able to prove that you have a performing asset.  It could be the ideal note, as far as structure is concerned, but if the payments aren’t flowing  and on time the return on the note doesn’t make a hill of beans.

Note Investors are purchasing the cash flow payments, the most important thing they want to know is the likelihood of those future payments to continue as agreed to in the ORIGINAL promissory note.  Sound accounting practices will make this process easy for you to prove.  If you are going to do the accounting yourself my suggestion is to open a separate bank account only for that note.  The account can act as a clearing account for all you note transactions before you transfer the money  to your personal account.  This will document your payments, give you image copies of the deposited checks and you will have the bank statement at your fingertips.  This way you will be able to prove you have a performing asset.

If you are one of those that would rather not deal with the accounting of the note have a Loan Servicing Company, like The Texas Note Company, service your note.

5.  Interest Rate

Like the down payment sets the tone for the real estate transaction, the interest rate sets the tone for the value of the note.  Note investors are looking for a 9 – 12% yield, that being said don’t write a note that has a 5% interest rate amortized over 30 years.  The only way a note investor will even consider that is by offering a deep discount.  Secondly if you are ok with a 5% yield on you money/property go ahead and offer a 5% interest rate.

There is no reason to offer a buyer the type of rate they could get at a bank, and if they couldn’t qualify for a bank loan why would you take that type of risk and offer them the same rate.  Banks have deeper pockets.  You have to keep yourself in mind when you set the interest rate.  5% is to the benefit of the buyer, not you.

My suggestion is to offer an interest rate of 10%, that will add strong value to your note and be attractive to investors.  If you are bartering with the buyer do not go below 8% and expect to keep the value in your note should you decide to sell your note.

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