In today’s tough property market many you found it necessary to agree to an owner-financed note in order to be able to get the sale. This means that you are getting a cash flow from the sale of your property and this can be an attractive feature depending on your circumstances. After all, you should be getting a much higher interest rate than if you had received cash for your house and put the money in the bank. However, you find you would now like to get the cash – perhaps there is something you need to do with the money or just find administering the note a hassle, even though there has been no problem with payments. Many people find the monthly wait for the payment stressful. After all, who knows what might go wrong for the buyer and you might be faced with having to take legal action, apart from the fact that any missed payments would seriously devalue the note. So you decide to go for the cash.

A question uppermost in your mind would be “How much can I sell my note for? This depends on the terms of the original note – these terms would determine the risk and reward from your note and therefore what price a buyer would be willing to pay. When you drew up the note originally, you would have considered factors such as the down payment (at least 10% but preferably 25%), the credit score of the purchaser (at least 600 on all tests), The amortization period, payment period (monthly preferred) and the balloon date (at least 1/3 of the amortization period). The interest rate should have been 2 ½ – 3 % over the mortgage rate. If the purchaser was an organization, you would need personal guarantees from the heads of the corporation otherwise you would be in a much weaker legal position. In addition, a payment history is very important. You need to be able to show that regular payments were made and the buyer is up-to-date with payments (this makes it a “seasoned” note with a lower risk and higher value). If all these factors are ok, you should be able to get a good price which would be based on the net present value of the remaining cash stream at a discount rate based on the estimated risk of the investment.

Who would buy a cash flow note? The note buyer most sought after would be one of the major institutions. The institutions are keen to buy secure notes offering a good return in today’s market and either keep them or securitize them for resale. They are the least likely to come back to you in the event of a problem with the purchaser as they are set up to administer such a cash flow note. A private note [Read more...]