Is It Time to Sell Your Mortgage Notes? Here’s How You Know

David Cohn
Jul 26, 2021

Life doesn’t always go as planned. No matter how well you manage your money or your commercial property portfolio, certain events—including a pandemic—can put stress on your finances.

If you need immediate cash flow, one of your options is to sell your mortgage notes. But how exactly does this process work? And is it the right choice for your situation?

In this blog, we’ll talk about what a mortgage note is, why someone might want to sell a mortgage note, and how to sell a mortgage note.

Mortgage notes defined

Mortgage notes are essentially promissory notes. They are written agreements between lenders and borrowers that show the loan details and are repaid over time. A mortgage note will typically include information such as:

  • The principal loan amount
  • Loan issuance date and place
  • Loan terms
  • Loan duration
  • Interest rate
  • Prepayment penalty agreement (if there’s one)

The bank or lending company you pay your commercial mortgage to is the ‘holder’ of your commercial mortgage note. Once you’ve paid off the loan, you take possession of the mortgage note and sell it to get the funds you need.

Many commercial real estate investors also buy mortgage notes as investments and as a way to diversify their portfolios. If you fall in this category, you also may decide to sell the mortgage notes you own to free up some cash.

Commercial mortgage notes – When to consider selling yours

The number one motivation for people who want to sell their mortgage notes is to obtain a sizable sum of money fairly quickly.

In addition, many commercial real estate investors sell their notes to fund new business ventures or pay for personal expenses.

Below is a list of the most common reasons why people sell their commercial mortgage notes:

  • To invest in a new commercial property venture
  • To invest in alternative investment vehicles
  • To pay off debt
  • To build up emergency money
  • To fund their retirement accounts

You can pretty much use the money however you want. There are no restrictions or requirements on how to use the funds. In addition, selling mortgage notes is often a much smoother process than closing a regular mortgage deal.

There are many different mortgage note selling options, and the best choice depends on how much money you need.

For example, you can choose to sell the entire mortgage note, sell only a specific dollar amount, or sell a specific percentage/portion of the mortgage payment.

Mortgage note selling process – How it works

The selling process is relatively simple because many companies are interested in buying notes and taking on the risk. After all, these notes are essentially collateral-backed securities, making them safer than other investment vehicles.

Once you’ve decided to work with a buyer, you can either call them or go on their website and input the details they need from you, then wait for their offer.

The offer you will receive will be based on several factors, including the current market, the terms of the note, and the results of the appraisal of the property, among others.

Commercial property note – How much is it worth?

While you won’t get the exact principal from your commercial mortgage, you’ll still likely receive a sizeable offer.

We’ve listed the factors that are typically used to determine the value of a mortgage note so you can understand how much funding you will receive:

  • Property appraisal
  • First position
  • Clear title
  • Underwriting pay history
  • The borrower’s credit rating
  • Mortgage term length
  • Interest rate, amount, and eight of remaining payments
  • The size of the down payment placed on the note

You’ll find most if not all of this information on the deed of trust and promissory note.

Mortgage notes – How to get the best value

Not all commercial mortgage notes are valued the same. Some are easy to sell, while others are more challenging.

Here are some tips from experts on how to get the best value from your mortgage note:

  • You will find typically receive more money if you sell only a percentage/portion of the note.
  • Contracts including both land and building are likelier to be approved.
  • Notes with shorter terms overall usually receive a higher cash value.
  • Values typically increase when market interest rates are low.

Also, in general, it’s better to sell payments that are due in the next few years if you want to get a higher value. It might be challenging to sell notes if the borrower has a history of missing payments. Conversely, borrowers with excellent credit get lower discount rates and more money.

Choosing a commercial mortgage note buyer

It’s essential to work with a trustworthy and responsible buyer if you want to sell your mortgage note. Find a buyer that has passed verification processes with local agencies.

Then, try to find one that is known for its aggressive offers and asset evaluations. For example, some buyers can provide an attorney for free while funding you directly to give you a more competitive rate.

You can’t go wrong with a buyer that has been doing this for decades. The best ones have in-depth industry knowledge and experience to fund your commercial note within days successfully—usually within two weeks. They should be able to provide partial and complete purchase buy-out options, too.

Ask if they pay for all the transaction expenses. If they do, then you can be sure that the price they offer for your note is the actual amount you will get at closing, with no deductions.

Suppose this is your first time selling a commercial mortgage note. In that case, it might make sense to consult with a commercial property financing specialist who can advise you on how commercial notes work, how they are sold, and whether selling is in your best interest.

These experts can also explain how commercial notes are valued and how you can receive the best possible sale price should you decide to sell. They can even help you structure the sale of your note to accomplish your goal.