A real estate note can also be referred to as a real estate receivable, and it is a document that obligates an individual or a company (buyer) to pay money to another person or company (seller). The buyer could be buying a real estate such as a building and therefore give a down payment to the seller and promise to pay the balance in installments. This transaction may seem like a loan, but it is not one because the buyer is only deferring payment to a future time, no third parties such as banks are involved, and apparently, no exchange of money is done for the unpaid amount. Most people would refer to such transactions as owner-financing, but to distinguish them from loans, others refer to them as installment sales. However, the real estate receivables are a form of promissory notes and the future payments a seller expects to receive from them act as an asset. This asset, therefore, can be sold to another person and receive a lump sum.
Many holders of real estate notes may decide to sell their notes for various reasons, but the main reason is basically to have money to spend on specific needs. Other reasons to sell such a note include the need to eradicate the risks involved in holding the note, to take advantage of an investment opportunity, to pay some debts or simply attain liquidity. It is not always the seller’s choice to receive the notes, but since one wants to sell the property, the installments sale becomes the next better option. There are other equity settlements such as inherited notes or divorce notes that usually leaves an individual with notes that they did not want in the first place. In this case, it is easier for them to find someone who can buy the notes at the current value and life goes on.
The only unfair thing about selling a mortgage note is the fact you will have to sell it at a discount. This means that the cash you receive is lesser than the current value of the notes because for one, the second lien will receive the payments over time and secondly, the value of money usually depreciates over time. There is a high risk involved in holding these notes, so the buyer must incorporate these risks in the transaction and thus buy the notes at a lower value. The selling price of a mortgage will depend however on different factors such as the economic environment, terms of payment and the degree of risk involved with holding the notes. Both the seller and the buyer might require the advice of an expert before settling at any price.
Sometimes a seller of the mortgage note can decide to sell part of the notes if the full amount is not required at the moment. This transaction is usually known as a partial purchase, and there are two ways in which the agreement can be arranged. In this case, the buyer can agree to receive the first few installments to cover the amount given to the note seller or agree to take a percentage of installments received until the amount is fully settled. The good thing is that either way the seller gets to receive the cash required at the moment.
