Buying Mortgage Notes

The realtor searched online looking for someone buying mortgage notes. The clients she had represented had not lived in the house for four years, and had, in fact, moved to Arizona to get away from the dark atmosphere that pervaded the area. The area of the county in which the house was located was a vast wasteland of unsold property, due to three large manufacturing plants closing in just the past ten years. They had sold the house on a land contract to a supervisor who had moved into the area from the South. Now the guy had tripped up on a few monthly payments and the couple was getting very antsy. The question was, "Would anyone want to buy real estate notes in this barren economy when seemingly nothing was moving?" Surprisingly, the couple knew nothing about selling a property note to a broker, so when the real estate agent started sharing the information with the couple, they began becoming more and more interested. "For the word of the Lord is right; and all his works are done in truth." (Psalm33:4) Here is some of the information the realtor gave this husband and wife:

The realtor began by sharing that there are businesses and individuals who made a living buying mortgage notes on a regular basis all across the country. The woman explained that there were a number of factors going in to deciding how much the two of them would receive for the note. The couple had bought the house ten years ago with a thirty thousand dollar down payment fixed rate loan for thirty years. They had purchased the house for one hundred and fifty thousand dollars, and had put ten thousand dollars on the mortgage principle during that time. They were now holding a note for about one hundred and ten thousand dollars. The couple allowed the land contract owner to pay a nine hundred and twenty-five dollar a month mortgage payment, not including real estate taxes. But now the couple was paying two mortgages in two very distantly separated states.

The realtor continued to share that in order to buy real estate notes, a broker leaves nothing to chance. This professional is out to make money and in order to do that, many things would have to go into the formula. Buying mortgage notes is a bit of an art form, with the bottom line really being the time cost of money. What this term means is the length of time the broker will have to hold the note before it is paid in full. So the further out the pay off date is, the less value the note is to the broker because the note will have to be held for a longer period of time, when markets and money might become tighter and more expensive. In the land contract, the couple had also offered the supervisor the same interest rate they had gotten originally, even though real estate interest rates had actually risen a point and a half. This surprised the original owners to learn that because of the lower interest rate, their note was worth less to the broker.

If there had been a balloon payment in the land contract, the realtor explained that the note would be very interesting to a person or business buying mortgage notes. If the payment is a long way off in its due date, there is not much value to the broker, and if the payment is coming due soon, and it appears the holder of the mortgage will not be able to pay the large payment, again not much value to the one who wants to buy real estate notes. When the couple sold the house on land contract to the supervisor, the contract stipulated that the note could be assumed by another buyer, leading to another problem for the broker. The supervisor had been a pretty good payer of the mortgage until recently, but with an assumable note, the next holder of the note might be a slow poke or even a deadbeat when it would come to paying. Another risk for the broker.

One of the strongest factors in favor of the couple was the fact that the property was a residential single family dwelling. However, this has a downside also because it is in an area of the country where there appear to be a lot of decay, or at least stagnation. But the realtor also explained that to a business buying mortgage notes, the loan to debt ratio is huge. Because the house was appraised recently at one hundred and forty one thousand dollars, and the remaining debt was at about one hundred ten thousand dollars, the interest to the business or the person that would buy real estate notes is marginal. The broker will consider that a person assuming the Arizona couple's mortgage note will be at a loan to value ratio of seventy eight percent, not a bad figure. This means that the new buyer of the mortgage may, in fact, stick around because of an investment of at least twenty two percent in the transaction.

It turns out that for the couple's situation, if the twosome sold their note to a broker, the duo would receive about sixty percent of the appraised value of the house, or eighty-four thousand, six hundred dollars. The couple would have to make up the rest of the twenty-six thousand dollar deficit to make the deal fly. In the end, it was decided that Arizona was more important than twenty-six thousand dollars. The couple could handle a ten year loan for twenty six thousand dollars. Another time when quality of life wins over the accumulation of things.

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