Private mortgage notes are bought by investors who want the monthly payments: individuals, small investment companies, note funds and people investing through a self-directed retirement account. A note broker is something else, an intermediary who brings your note to those buyers.
Why buyers want a note
A note buyer pays a lump sum today in return for payments over time. What they earn is the return those payments represent on the price paid, and to reach the return they want they pay less than the balance still owed. The gap between the balance and the price is what selling costs you, whichever kind of buyer you sell to.
The buyer also takes on the risk that the borrower stops paying. More risk means a higher return asked and a lower price offered.
The main kinds of note buyer
| Buyer | Who they are | What that means for you |
|---|---|---|
| Individual investors | People buying one note at a time with their own savings | Can be flexible on unusual notes. Capacity is limited, and some are new to it. |
| Retirement account investors | Individuals buying through a self-directed IRA | The account is the buyer, so its custodian has to process the paperwork. |
| Note-buying companies | Businesses that buy notes regularly, with their own or borrowed money | Set processes and clear criteria. Each has notes it wants and notes it declines. |
| Note funds | Pooled money from several investors, run by a manager | May prefer larger notes or groups of notes that fit written rules. |
| Specialists in troubled notes | Buyers who focus on notes where the borrower has stopped paying | Will look at notes others refuse, at a price that reflects the work ahead. |
Banks are missing from the table because a note written between two private parties when a property was sold is unlikely to fit the lending standards a bank works to. The market is made up of private investors who price each note on its own facts.
What all of them read
Tastes differ, but every buyer starts from the same facts. The payment history shows how many payments have been made and whether they arrived on time. Equity is how much the property is worth compared with what is owed on it, and lien position is whether your claim on the property is first in line or behind another loan. Buyers look at the borrower’s credit and down payment, and at the terms: the rate, the years remaining and whether a balloon payment is due.
The property counts as well. A house the borrower lives in appeals to the widest range of buyers, while bare land, mobile homes and commercial buildings each draw a narrower set.
Why one note gets different prices
Two buyers can study one file and come back with different numbers in good faith. Note offers differ from buyer to buyer because the returns they want are not the same and because one may favor your property type and bid harder for it. A partial is the purchase of a set number of payments, and not all note buyers offer partials.
You cannot see that spread from one quote. To learn which kinds of buyer would bid on your note, send us the details and we will put the file in front of the ones it suits.
Buyers and brokers
The difference between a note buyer and a note broker is who pays. A direct buyer funds the purchase and owns your note afterwards. A broker puts up no purchase money: the broker presents your note to several buyers, collects the offers, helps the sale close and is paid out of the transaction. Some firms do both, depending on the note, and we are one of them. We buy some notes ourselves and broker the rest, and you are told which is happening on yours.
Other firms will not always volunteer it, and working out who you are dealing with is worth doing before the conversation turns to price.
The question to ask whoever contacts you
From a direct buyer you get one company’s price, and from a broker you should get a comparison. In both cases ask who is funding the purchase and what any middle party earns, because the answer tells you which row of the table you are dealing with and how many hands the price passes through. Ask at first contact, before any of the paperwork in selling a note has started and while walking away still costs you nothing.
Related questions
Will a bank buy my private mortgage note?
It is unlikely. A note written between you and your buyer usually does not fit the lending standards banks work to. The buyers for these notes are private investors and companies that price each note on its own facts.
Can my borrower buy the note from me?
Your borrower can offer to pay the note off early, sometimes for less than the full balance. That is a payoff and not a sale to an investor, and it is worth comparing with outside offers before you agree. A CPA can tell you how a reduced payoff would be treated for tax.
Do note buyers purchase notes in every state?
Some buy across the country and some keep to certain regions, and each buyer has states and property types they prefer or avoid. That is one reason offers on the same note differ, and one reason to put your note in front of more than one buyer.