Seller Financing: What Makes A Valuable Mortgage Note?

What makes mortgage notes valuable for reselling to note investors?

Seller financing appears to be rising again. It likely will continue this trajectory until banks offer easier access to borrowing, and they can rebuild trust with those with capital, and give them a larger share of the profits. Creating seller financed notes can be a great creative solution to a variety of real estate scenarios. It can be a highly profitable choice for many sellers and investors. Though while it can be a major profit center, it is also an area in which investors make the biggest blunders. This is chiefly because they are focused on cutting a deal to move the property, and not on what makes an appealing or valuable asset for note buyers.

Keep these factors in mind when creating your next note, so that you maximize your upside and exit options…

Location

As with all things real estate, loans are about “location, location, location.” Where the collateral is will make a big difference in how many potential buyers there are for your note, and how much they might pay for it. As easy way to get this right is to stay on top of where banks are lending and are offering borrowers the best deals. They typically shy away from rural areas, those high in fraud, and declining markets.

Property Type

Lenders and investors also have various preferences for different property types. Mobile and manufactured homes are typically the bottom of the barrel and the least appetizing. Many avoid condos due to the wide variety of issues they can present as well.

Loan Amount

Loan amounts and UPB (unpaid principal balance) are important too. Many investors may not want to mess with small loan amounts. They are more work than they are worth, unless they are being bought in bulk, in the millions of dollars range. At the same time, high loan amounts can mean a very limited buyer pool. They mean a lot of risk on one asset for an investor.

LTV

The Loan-To-Value says a lot about the deal. It shows the strength of the deal, how much cushion lenders have, and it will make a sizable difference if there is a default.

Interest Rate

Lending and note investing is all about yield. The rate needs to be competitive and present a substantial reward for the level of risk involved. Just be wary of going too high, to the point where you may be making ‘high-cost’ predatory loans.

Performance

As with most things in life, they say the best predictor of future performance is past performance. You can sell non-performing, newly originated mortgage notes. However, the more seasoned loans are, with good performance, the more valuable they will be. Keeping them for 3-12 months before trying to sell could make a sizable difference in how much you get for the same note.

Investment Opportunities

Find out more about investing in secured debt and real estate, go to NNG Capital Fund