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Can I Sell My Note Right After I Create It? Reality Check on Simultaneous Closings

cash for your real estate noteThe simultaneous closing is a little-known, but powerful strategy for getting real estate transactions closed in difficult markets. Wouldn’t you like the competitive edge if you’ve got property on the market right now?

I’ve had a couple of questions about it this week, so it seems like a good time to have a little one-sided chat (or you can comment and make it not-so-one-sided :-). The idea is this:

  1. The seller advertises “Owner Will Carry” to attract more buyers, get a better price and close quickly . . . or at all. Qualifying for an institutional loan is a royal pain in the nether regions. Even good buyers are having a hard time getting loans right now.
  2. Then, the seller (now note holder) sells his note to a note buyer/investor, and walks away with cash. In this scenario, the cash is coming from a note investor instead of the buyer’s shiny new Cash-To-New-Loan bank financing.

In past times, it was fairly easy to do this in a simultaneous (or double) escrow, so that the property seller walked away with cash immediately. These days it’s a lot harder to make that happen.

The seller/note holder will generally need to collect at least 3 months’ worth of payments to give the note a little seasoning, proving that the buyer/payor can actually make the payments. A note buyer is not generally willing to risk a first payment default.

Having a note in default is not only a huge hassle, but destroys the return/yield the investor expected when they bought the note . . . and investors like to get the return they expected, or better. The smaller the perceived risk, the more the note buyer will pay for it: the more seasoning, the better.

Unlike eggs, you can’t ruin a note with too much salt.

So, if I’m willing to carry paper to get my deal put together, but my objective is to walk away with as much cash as possible as soon as possible (by selling my newly created note), then here’s what I’d want:

  • A buyer that was going to owner occupy the SFR property (use it as a primary residence)
  • A 20% down payment, or more
  • A buyer with a great credit score, preferably above 720, but definitely not below 620
  • The ability to wait 3 months, or longer, before trying to sell my note
  • A great way to document payment history (I’d use a note servicing company)
  • An understanding that even in the most ideal of circumstances, I will take a significant discount on my note. I may get no more than .80 to .85 cents on the dollar, depending on a variety of factors. But I need the cash, and cash now is better than letting inflation eat away at the value of future payments
  • A fully amortized note with the shortest term possible. Instead of the traditional 30 year note, I would rather have a 15-20 year note. Usually a 5-10 year balloon protects the value of a note, but these days, most note buyers don’t trust that ready and favorable financing will be available when the buyer will need to refinance. They buy/price a note with the expectation that they will have to extend or restructure the terms of the note.
  • An interest rate of 8% or more
  • I’d want to be open to the idea of a partial sale of my note to minimize the overall discount. Maybe I’ll only sell the next 7 years’ worth of payments. I’ll get a good chunk of change now, and then get my note back again. The note balance will still be pretty high when it’s reassigned to me, and I’ll start getting the regular monthly payments again. And I can always do another partial if I want another lump sum of cash later on.

In this market, I’m being much more careful about the notes I buy, but if you are a flexible and reasonable seller, then I can help you put your deal together in a way that meets the needs of all concerned.

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