When residential or commercial real estate is purchased, a mortgage note is created. This document acknowledges the debt created by financing the property and includes a promise of repayment. Seller financing creates a note through the provision of a first or second mortgage. Over time, the seller may no longer have interest in financing the property. In this case, the individual finds a note buyer interested in purchasing the note and providing cash in exchange.
If the seller is in the first position, the individual holds the deed to the property. If the property purchaser stops making payments outlined in the seller financing agreement, the property seller may wish to sell the note because a default situation is likely. When the note purchaser buys the note, it can pursue the financing that the sellers were entitled to and assumes the rights to the property previously held by the seller.
This arrangement can be quite lucrative to an investor interested in creating a real estate portfolio. However, as with all financing arrangements, there is risk involved. For this reason, only the most experienced note buying companies remain in business. After making the decision to purchase a seller-financed note, they follow a detailed checklist to ensure the transaction will be successful. The investment most be solid, the company must be protected, and all aspects of the transaction must be in place.
Relying in property value information provided by the seller is not a good idea, so the note purchaser has a third party conduct a property appraisal. The results are used to determine whether the deal features a sufficient level of equity. Appraisal information is also useful if the note will be quickly resold. A note purchasing company also must ensure that there are no liens or encumbrances on the property. A title search will provide this information and the note purchaser must buy a title insurance policy at the time of the transaction to protect its interests.
When a note secured to a property is purchased, property ownership is transferred. The seller must provide the property deed because this provides ownership rights to the property should the homeowner forfeit. An assignment of contract is also required, as this details the terms and current value of the note and the portion of the interest being purchased. Some note purchasers buy either full or partial notes, so this information must be clearly outlined.
After buying a note, the company should have the property occupant change the property insurance policy. The note purchaser should be listed on the policy as an additional insured. If something happens to the property, the note buyer will be protected. Limiting exposure in this way is critical because accidents can happen.
Becoming a note buyer is not something to be undertaken lightly. Many new companies fail because they are unprepared or cannot handle the risk. A note holder should conduct thorough research to find a reputable note purchasing company that can put its money where its mouth is and offer a hassle-free experience.
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