Would you like to get immediate cash for a real estate note you're holding, instead of waiting for future payments? Consider selling your note for an up-front, lump-sum payment.

Perhaps you need funds for another investment, a business venture or an emergency. Regardless of the reason, selling your real estate note can provide money to meet your needs in a matter of weeks. When selling a real estate note, you can receive one lump sum for your investment instead of having to wait for monthly payments. This can reduce your level of risk, plus free up funds that you can spend however you wish.

Understanding How Real Estate Notes Work

A note-often called a mortgage-is a financial instrument by which the owner of real estate borrows money against the property. A homeowner can have several mortgages on one property-totaling more than the value of the property with some programs. But in most cases, the note is only a portion of the value of the property. For instance, the property may be worth $200,000, but the mortgage is for $180,000.

The first mortgage is usually held by a large lender, such as a bank or investment firm. Second liens are typically held by large companies, but are also established by individuals who often agree to take on a second mortgage to help buyers qualify to purchase their property. For instance, the buyer may put down 5 percent in cash, take on a mortgage for 75 percent of the value of a house, and then the owner creates a note for the remaining 20 percent to make the deal work.

Real estate note buyers generally prefer to buy real-estate secured notes that are in the first lien position or wrap around the first lien position. Notes in a second lien position, naturally, will sell for less unless there is considerable equity in the deal.

Note buyers, whether private individuals or large institutions, will generally discount the note (pay the seller an amount below the note's current balance) to offset their risk and meet certain yield requirements. The amount of discount varies across notes, but the two biggest factors in determining the discount (besides the type of property) are the amount of equity in the property (cash down payment plus principal payments received) and the credit of the borrower. The more equity and the better the buyer's credit, the more that the note is worth.

Mortgage note buyers purchase all types of privately-held mortgage notes, including promissory notes, land sale contracts, deeds of trust, contract for deeds and other debt instruments secured by residential, commercial, land and other types of property. You can sell the entire note or only part of it, depending on your immediate and future financial needs. For example, you could opt to receive a lump sum of money now, then part of the payment each month thereafter.

Steps to Cashing in a Real Estate Note

Obtaining cash for a real estate note is a relatively straightforward and quick transaction. Here's how the process of getting money for your real estate note goes:

Step 1: Fill out an initial form to provide information about the property and your note.

Step 2: Supply information about your borrower.

Step 3: Receive an estimated pay-off quote within 48 hrs.

Step 4: Complete the remaining paperwork required to proceed.

Step 5: Submit the signed and completed documents.

Step 6: Close within a matter of days and receive your money.

Tips for Making Real Estate Notes More Appealing to Investors

Selling real estate notes can also be used as an ongoing exit strategy for investors offering owner-financing. You can use installment-financing to close the deal with buyers, and then convert their future monthly payments into quick cash by selling the note.

If you're going to create a real estate note, there are some guidelines you can follow to make it more appealing to other investors-so you can maximize the amount you'll receive when you sell your note. First, get a good down payment. This means obtaining at least 10 percent for a standard house and 20 to 30 percent for commercial properties, land, and mobile homes.

You also should try to sell to a buyer with a decent credit history. A buyer with a FICO (credit score) of at least 650 is preferable, although a slightly lower score may be acceptable. If you provide owner financing to someone with a FICO score below 600, you can expect to take a larger discount when you sell the note.

Also, make the term of the note as short as possible, keeping in mind that a 10-year or 15-year note is worth more than a 30-year note. And ensure that the interest rate being charged is at least as high as comparable bank rates.

Additionally, here are some positive factors that can enhance your ability to profit from selling a real estate note:

- The property is owner-occupied.

- There is access to power, water, and roads (for land).

- In regard to commercial notes, multi-unit apartments or general purpose office buildings are easier to place than specialty businesses like restaurants.

- The property and surrounding area are in good condition.

- The sales price is not far above the market value, and the title to the property is clean.

Selling real estate notes is a viable alternative for investors needing instant access to cash.

David Springer

David Springer has been a financial planner for over 20 years. For the past 5 years David has been providing consulting services to Sovereign Funding Group. Sovereign Funding Group offers it services in all 50 states as a specialty financing company to small businesses and individuals.

David interests include riding his bike, scuba diving, taking care of his many aquariums and sports. His favorite sport is hockey.

David lives in Columbia, MD with his wife and child.