Promissory Note Buyers are individual investors or companies who pay cash upfront in exchange for the right to receive remaining note payments. In this article, we’ll cover what types of notes may be sold, who buys them, and what to expect when working with a Promissory Note Buyer.
What Is A Promissory Note?
Generally speaking, a promissory note is a written promise to pay. In non-legal terms, it’s an IOU. One party promises to pay another party under specific terms.
Most people are familiar with home loans or automobile loans where there’s an agreement requiring the buyer to make a certain payment each month until the loan is paid in full. Promissory notes may include interest, late charges, balloon payments, or other negotiated loan terms.
Porch Swing Funding is a promissory note buyer who specializes in purchasing seller-financed real estate notes. Real estate notes are created when a seller sells real estate to a buyer. Rather than the buyer going to a bank or other financial institution for a loan, the seller agrees to accept a portion of the purchase price over time. At this point, the seller no longer owns rights to the property. Instead, they own “paper” which can be sold like any other asset.
Why Would Someone Buy A Real Estate Note?
By themselves, promissory notes are enforceable contracts. But real estate promissory note buyers also benefit from the value of the property connected with the loan.
A document called a Mortgage or a Deed of Trust is recorded at the County Recorder’s office. It states that in the event of a default on the promissory note, the noteholder has the right to collect the unpaid balance plus reimbursement for certain fees through foreclosure.
Assuming the real estate securing a promissory note has a high enough value to pay the outstanding loan balance, anyone holding the promissory note has a backup plan in the event of default.
Promissory Note Buyers always check the estimated value of the property securing the loan, and verify that the paperwork and title would allow them to foreclose if necessary.
Who Purchases Contract For Deeds and Land Contracts?
Most, but not all, Promissory Note Buyers also purchase seller-financed real estate loans such as:
- Contract for Deeds
- Real Estate Installment Contracts
- Land Contracts
- Bond for Deeds
While all of the above are types of real estate seller-financing, they differ slightly because the buyer doesn’t receive title to the property until the balance is paid in full.
Where Can I Find Promissory Note Buyers?
Promissory Note Buyers market to noteholders by sending letters or postcards, print ads, and online ads.
They also maintain relationships with CPAs, Title Companies, Attorneys (especially Estate and Divorce), Bankruptcy Trustees, and Loan Servicing Companies.
Some are listed with organizations such as the Better Business Bureau.
Do Promissory Note Buyers Charge A Fee?
While there really is no fee when selling a note, they are purchased at a discount. Real estate notes are bought in what is referred to as the Secondary Market. Fluctuations in market price are driven by interest rates, inventory, the housing market, unemployment, and the economy.
Beyond the factors above, seller-financed notes are also priced based on equity, borrower credit, payment history, the type of collateral, and the note’s terms.
When a price is established it takes into account all the factors above, plus the financial benefits to the Seller, who will receive a large lump sum at closing, whereas the buyer must wait for payments to arrive over time.
What Does A Promissory Note Buyer Need From Me?
When contacting a note buyer you should be prepared to email or fax copies of these documents:
- Signed Promissory Note
- Recorded Deed of Trust or Mortgage
- Final Settlement or Closing Statement
If you have a contract for deed, installment contract or similar, you will provide a copy of the contract rather than items 1 and 2 above.
In addition, you’ll be asked to provide:
- Current Loan Balance
- Date of Last Payment Received
- Date of Next Payment Due
What Happens If I Decide To Sell?
Selling a note consists of:
- Signing an initial agreement to sell
- Due diligence perfomed by the Promissory Note Buyer
- Closing and Funding
Promissory Note Buyers provide sellers with an alternative to collecting note payments over many months or years. Pricing is determined by more than just the interest rate and the number of payments remaining. Noteholders should store paperwork in a secure location, and maintain detailed records. Once sold, nothing will change for your borrower except where they send payments.