Tips for Private Note Holders
Your note is an investment that has value. The value of your note is dependent upon a few factors. The terms of the note will be used in valuing it. Generally a down payment of ten percent or greater is a good start. A term that is shorter will result in a more valuable note due to the payback occurring sooner. An interest rate that is well above the market rate can also add value to your private mortgage note. Don’t get greedy and break usury laws if your state has them, but recognize that your borrower may not qualify for a bank loan and the extra risk you take in lending to them should be balanced by a higher interest rate. Although your borrower may not fit the criteria that a bank prefers, you should be looking for someone with good credit. Their creditworthiness factors highly in the valuation when you go to sell your note.
The payment history of the note is what is used to establish whether it is a performing note or a non-performing note. If the borrowers have been paying the agreed upon payment on time consistently since the note was originated, then your note is considered to be a performing note and will command a better price. If they are behind on payments, or not paying at all, the note will be considered a non-performing note and will not be worth as much. One easy way to add value to your note is to use a loan servicing company that reports to the credit bureaus. Having a professional company to service the note is not very expensive, but it establishes good documentation that the payments were received on time and in full. Having a loan servicing company report to credit bureaus will increase your borrower’s credit score and in turn, the value of your note. A servicing company will also make sure that the proper tax documentation is being sent to your borrower. This is a legal requirement and helps give your borrower the biggest single tax deduction most Americans have available to them.
Finally, you need to treat your note itself and the supporting documentation as the valuable investment that it is. Keep all the paperwork together, and keep it safe. The paperwork is what you will actually be selling if you go to sell your note. Take the time to gather everything up and store it in a safe in your home, or a safe deposit box at a bank. If you spend a little time applying the tips to the care of your note, you will guarantee that you get the best price when you go to sell your note. The final tip is to find a good company to buy your note. If they are only concerned with a fast close and don’t take time to talk to you about the note, they may not be concerning themselves with understanding the entire situation and are likely to offer you a lower price than you deserve.