In my January 2018 Newsletter, I wrote the following Q and A:
Q – I have a $100,000 note. If I sell my note, I want the full $100,000. The note says that is what I am owed. I have heard that note buyers will not pay me the full amount. Why not?
A – Risk! Your $100,000 note is a Promissory Note – your buyer “promises” to pay you the $100,000 due in monthly installments over a specified period of time. He does not “guarantee” to pay you. The biggest risk is that your buyer will not keep his promise – not a pleasant thought. Note buyers must begin their risk analysis with the downside – possible foreclosure. All the elements of your transaction – property type and condition, buyer credit worthiness, amount of down payment, note terms, timeliness of payments, etc. are evaluated. The result is the “price” to you. Unlike traditional mortgage lenders, note buyers don’t meet your buyer, don’t ask for his tax returns or pay stubs, don’t talk to his employer, etc. This added risk is accounted for in the pricing. When all these variables look great, your price should be around the top that the secondary market is paying. Also, unlike banks who may sell off some of their loans, most note buyers keep their notes to term. It’s like a marriage – for better or worse!