Selling a real estate note can be a smart move—whether you need cash for an investment or simply want liquidity. A real estate note, often called a mortgage note or promissory note, can be a powerful financial tool if you know what drives its value.
1. Interest Rate: The Core Value Indicator
The interest rate attached to your real estate note is one of the biggest determinants of its value. A higher interest rate makes your note more attractive because it represents a better return for potential buyers. Think about it this way—if you have a note that carries an 8% interest rate, it’s far more appealing compared to a similar note with only 4%. Investors are essentially buying the income stream from that note, and higher interest means higher returns.
However, market rates fluctuate. If the current market interest rate is lower than what your real estate note offers, you’re in a strong position to negotiate a higher price.
Tip: Compare your note’s interest rate with today’s market rates. If you’re offering better returns, make sure buyers know that.
2. Payment History: Building Trust with Predictable Payments
Payment history tells a story, and it’s one buyers are eager to read. A consistent payment record builds trust and indicates that the borrower is reliable, which makes your note more valuable. Buyers want reassurance that the income stream will continue without interruption.
If the borrower has missed payments, that’s a red flag. Missed or late payments add risk, and when there’s added risk, buyers often expect a discount.
Action Point: Make sure your records are organized and clearly show a history of timely payments. This documentation could make a huge difference in the price buyers are willing to pay.
3. Remaining Term: Risk Is Time-Based
The remaining term of the real estate note also plays a key role in its valuation. Notes that will be fully paid off sooner are less risky because there’s a shorter window for anything to go wrong—like a financial downturn or a borrower defaulting. A note that has only three years left is generally seen as less risky compared to one that has ten or twenty years remaining.
Shorter terms generally mean less risk for the buyer, which makes these notes easier to sell at a higher price. Longer-term notes, while they may offer higher total returns, also carry more uncertainty, which can drive down the immediate value.
Action Point: If your note has a long term left, you might consider renegotiating the terms to shorten it, thereby making it more attractive to buyers who prefer lower risk.
4. Borrower’s Creditworthiness: Know Who’s Paying
The value of a real estate note is directly tied to the borrower’s ability to pay. Buyers will want to know that the person responsible for paying back the loan is financially stable and creditworthy. If your borrower has a strong credit score, it reduces the perceived risk, which increases the value of your note.
Practical Step: If possible, get an updated credit report on the borrower. A solid credit rating could be your best bargaining chip during negotiations.
5. Type of Real Estate Note: Performing vs. Non-Performing
Performing Notes
A performing real estate note is one where the borrower is consistently making their payments on time. Buyers love these because they represent stable, predictable income. If your note is performing well, it can often sell for close to its full value, especially if other factors like interest rates and creditworthiness are also favorable.
Performing Note Features to Highlight:
- Consistent on-time payments
- Good interest rate
- Borrower’s solid credit history
Non-Performing Notes
Non-performing notes are a different game. These are notes where the borrower has stopped making payments. Buyers of non-performing notes expect a steep discount, often 50% or more, because they’re taking on significant risk. They’ll need to put in the work—potentially restructuring the loan or pursuing legal actions—to get value out of the note.
Key Consideration: If you’re holding a non-performing note, it may be worthwhile to try to negotiate with the borrower to get back on track. Even a few consecutive payments can shift a non-performing note into a more appealing category, boosting its value.
Real Estate Note Value Summary Table
|
Factor |
Impact on Value |
Action You Can Take |
|
Interest Rate |
Higher rate = higher value |
Compare to market rates, highlight it |
|
Payment History |
Good history = higher value |
Organize and present payment records |
|
Remaining Term |
Shorter term = less risk |
Consider renegotiating to shorten term |
|
Borrower Creditworthiness |
Strong credit = higher value |
Obtain and highlight credit report |
|
Note Type |
Performing = higher value |
Get payments on track if non-performing |
Selling a Real Estate Note
When you’re ready to sell your real estate note, it’s all about positioning yourself in the best way possible. Potential buyers are looking at these five factors to assess whether your note is worth their investment. Each element—interest rate, payment history, term length, borrower creditworthiness, and note type—contributes to how attractive the note is, and therefore, how much it can be sold for.
If you’re looking to get started, selling a mortgage note follows a similar process—evaluating the interest rate, ensuring a strong payment history, and targeting the right buyers. Understanding these details will help you navigate the sales process more effectively and maximize the value you receive.
