Ever heard of a mortgage note? This a written agreement between a seller and a buyer which states that the buyer will pay off the mortgage the note secures. In simpler terms, it’s a promise to pay or an IOU “I Owe You”. The note requires a contract indicating the payment schedule, interest rate, amortization period and consequences of non-payment. This is often confused by a mortgage deed which is a document outlining the collateral (in this case, the real estate property) that secures the loan. The property is used to repay the debt and cover the lender’s loss if the borrower fails to pay the loan.
It is important to know that there are two types of notes: Performing and Non-Performing. A performing note is when the borrower successfully makes regular payments according to the terms agreed upon. There are some cases where payments made in less than 90 days are still considered performing. This is similar to purchasing a rental property without dealing with tenants or overall property management.
On the other hand, a non-performing note is the complete opposite. This means that the buyer is unable to make any payment and foreclosure is most likely the next step. Whether they refused a repayment plan when the seller reached out or they were unable to keep paying, the money stopped coming in.
The note holder may decide to sell their mortgage note to a buyer before the refinancing occurs. The benefit of doing is the large lump sum upfront. These notes can either be sold partially or in full. A full sale basically means that you walk away with money in hand and no responsibility of how the mortgage performs. This is the choice of sellers who are looking to avoid the financial hassle of holding on to the note. It cuts out the monthly income, but gives the seller a large one-time lump sum payment. The drawback is that it’s sold at a discount since the buyer assumes your role together with the mortgage risks associated that you once had.
These notes hold a lot of value without the hassle normally involved in buying / selling a property which makes them a superb investment for a lot of people. However, things aren’t always as easy as they seem. Several things influence the final pricing of these investments.
One of the many factors involved is the down payment. The larger the down payment is, the more that it will lower the remaining amount of the loan the occupant must pay. Note buyers are generally attracted to ones with higher down payments because collecting large loans in full is harder than collecting smaller ones. The borrower’s credit score should also be considered. A good credit history means that payments will have a higher chance to be done in a timely manner. Buyers lean toward those who show good scores. The loan payment history is looked into as well. For the seller to get the best returns on a mortgage note, at least 6-12 payments must be made. The deciding factor in the success of selling is the risk that it poses to the potential buyer. If it gives a relatively low financial risk, the market value would eventually be higher.
Strategy Properties can help if you’re looking for notes or properties to buy in the Michigan area. For a more in-depth perspective about investments, you can contact us at (734)224-5454 or check out one of our podcasts with regards to mortgage notes.