Articles

THE SUCCESSFUL SALE OF A REAL ESTATE NOTE
By: Ruben Labiosa, CFNE, LLC
07/05/2009

An important key for the successful sale of a real estate note is to know the process by which the professional cash flow investor determines what to pay for the note. Understanding the process and what to expect will facilitate the sale of the note and ensure that it is sold for the highest cash amount possible.

A cash flow investor is a sophisticated buyer who will pay cash for the scheduled payments that a note holder is receiving. The scheduled payments are an asset that can be bought and sold for cash.

The process by which real estate notes are bought and sold is relatively simple and straight forward. Here is a limited, example of how it is done:

Ed has a promissory note that he wants to sell. Ed created the note when he sold his property and the buyer asked him to assist with the financing. The promissory note is secured by a deed of trust. He can sell his note and scheduled payments (cash flow) for a lump sum of cash, and use the proceeds to re-invest, take care of an emergency, or do anything else that he chooses.

Ed finds a buyer who is interested in real estate notes. After careful analysis of the note, the buyer agrees to purchase for an amount based on market conditions and what other investors are willing to pay for similar notes.

An investor determining the current value of a real estate note will look for the following criteria:

• The location of the property that secures the note.
• The type of property (residential, commercial, land, etc.)
• The comparable value of similar properties in the area.
• The amount of the note, the interest rate, and the amount of the scheduled payments (usually monthly
installments).
• The length of time that is projected for the note to be paid-off.
• The existence of a “due on sale” clause (penalty for pre-payment).

It is important to understand that the sale of a note can be influenced by the length of time that it takes to collect the payments. Inflation and other economic factors can play a significant role in determining the note’s conversion value, and fix the amount that the investor will be willing to offer. Remember, immediate cash is worth more than money promised to be paid in the future. A note holder seeking to maximize his investment might seriously consider selling his note now rather than later. Utilizing the services of a professional with direct access to investors will facilitate the successful sale of the note.