Helpful Hints for Creating Notes
Whether you’re considering creating a note or already have several the value can be increased by following a few simple guidelines. Many people don’t know how to create high quality notes and others don’t feel it’s necessary. Then, when they decide to sell, they are disappointed in the amount they are offered. The following can help you create higher quality (and more valuable) notes.
Let’s layout some basics.
What is a mortgage?
A mortgage is a secured loan that uses real estate as collateral. Most home buyers do not have the liquid assets needed to buy a home outright and need a loan to supplement their down payment. Mortgage lenders (typically, but not always, banks) fund the purchase for approved borrowers who then repay the loan, with interest, over a period of 10 - 30 years. A mortgage attaches a lien against the property until the loan is repaid according to the terms laid out in the note.
What is a mortgage note?
Mortgage notes are not the same as a mortgage, though both secure a loan. When a borrower takes out a mortgage, the lender produces two documents: the mortgage (see above) and the mortgage note, which is also called a promissory note. The mortgage note can be seen as a “promise to pay” and lays out the terms and conditions of the loan.
Why would a seller want to offer to finance the purchase of his house for a buyer?
Offering a to finance a seller’s purchase of a home you own is often called “seller financing” and is often a win-win situation. The seller can sell the house and decrease and/or defer the taxes paid on the sale and the buyer gets a home he/she might not otherwise be able to buy. The seller can often increase the home price since they are financing the purchase. By providing financing the seller is creating long term passive income.
Why do some buyers need a private mortgage?
There are many reasons. Maybe their credit isn’t the best due a single experience that wasn’t in their control. (Like a pandemic.) They may not be American citizens and therefore not qualify for conventional financing which is the case with many foreign tech workers. Or maybe they’re full-time investors who’ve reached their financing limit, but whatever the reason, they don’t qualify for conventional financing.
Why do some buyers need a private mortgage?
There are many reasons. Maybe their credit isn’t the best due a single experience that wasn’t in their control. (Like a pandemic.) They may not be American citizens and therefore not qualify for conventional financing which is the case with many foreign tech workers. Or maybe they’re full-time investors who’ve reached their financing limit, but whatever the reason, they don’t qualify for conventional financing.
Get Legal Assistance
One of the easiest ways to ensure that your note will have its highest value is to draft it with the help of legal counsel. Many people don’t want to spend the money for legal advice, but legal requirements differ in each state and poorly written documents may be unenforceable. Additionally, various critical provisions are sometimes excluded because the lender didn’t think to include them or were necessary.
Don’t Do Borrowers Favors
What does this mean? We often see notes drafted by individuals that have zero or below market interest rates. Or lack down payments when the houses were sold. Seller’s always have good reasons to give borrowers favorable terms. Maybe they were a good friend. Or were a trusted employee or renter. There are many ways to reward others that won’t decrease your notes value. Avoid decreasing the down payment or requiring below market rates
The Bottom Line
Seller financing increases the number of potential buyers, can increase a home’s sales price and be a great way to create passive income. Sellers avoid and/or defer taxes at the time of sale and gain a valuable product that can be easily sold at a later date.
If you have more questions don’t hesitate to call us. We’ll be glad to help.
About Us
ANB Funds invests in mortgage notes and is the managing entity for multiple investment pools. By primarily investing in seasoned, first position, performing residential loans, the fund offers investors consistent, low risk returns. The notes are individually underwritten and are purchased directly from the originators or in pools. The principals of ANB Funds have been involved in lending over $8 Billion on commercial properties, invested in senior’s facilities, and bought mortgages and other properties nationwide. The company has offices in Indianapolis, Indiana and Petaluma, California.
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