Real estate notes refer to legal instruments which record details of the property and property owner. Each time property is sold or transferred a new note is executed and recorded through local courts.
Real estate notes can be used as collateral if the property is owned outright or if there is sufficient equity that can be borrowed against. Notes can also be sold in whole or part in exchange for lump sum cash.
One of the most common uses of real estate notes is when property owners engage in seller carry back mortgages. This type of financing involves sellers acting as a mortgage financier for all or part of the purchase price. When partial financing is offered, buyers obtain a bank loan for the balance and the seller carries back the second mortgage.
Seller carry back mortgages are often used when borrowers cannot obtain financing for the full amount or if they do not qualify for bank financing at all. The way seller carry back financing works is buyers remit a down payment to secure the property. Owners enter into a contract that usually extends for 1 to 5 years. When the contract expires, buyers obtain bank financing for the remaining balance.
Seller carry back financing can be a good option for buyers with bad credit who are engaged in credit repair strategies. Buyers must be committed to remitting payments on time and in full each month to build a solid payment history.
Another use of real estate notes is when buyers invest in real estate investment trusts (REIT). This investment strategy involves groups of investors who pool resources to buy real estate shares.
Investing in REITs allow investors to generate profits from real estate without the headaches of owning and maintaining properties. Instead, investors purchase shares in a real estate management group. Investment properties include residential rentals and commercial leases. REITs pay shareholders a minimum of 90-percent of the profits earned through rental income.
Note holders can sell their notes to note buyers in exchange for lump sum cash. This is common practice amongst investors who offer owner will carry financing, as well as property owners who want to eliminate financial risks of holding the property.
Many reasons exist for selling real estate notes. Some of the more common include:
1. Eliminate the need to collect monthly payments from tenants or buyers engaged in seller-financed contracts.
2. Eliminate financial risks of reduced property values.
3. Obtain lump sum cash to pay off debts.
4. Obtain lump sum cash to purchase other investment properties or investment products.
Most people sell real estate notes to mortgage buyers, but property owners should consider seeking out private investors as well. It is important to understand that note holders do not receive full face value for real estate notes. There will be closing costs involved that normally are paid by the seller.
Individuals who buy or sell notes are advised to work with a real estate attorney to ensure contracts are legally-binding and property transfers properly recorded. This practice of selling real estate notes can be lucrative for investors and release note holders from financial risks.