Tips on Selling your Promissory Note

by : Nate Hananger

So you're thinking about selling your promissory note? Great! But, not so fast. There are certain steps to keep in mind so you are not overwhelmed when you get started. The following is a list of tasks you can expect to be faced with prior to cashing out the note. It applies to real estate notes, business notes, mobile home notes, land notes and any other promissory note that is secured by property or assets.

1) Find copies of all of the documents that were used to close the sale when it took place. Typically this includes (but isn't limited to) a copy of the Mortgage or Deed of Trust, a copy of the Promissory Note, the Closing/Settlement Statement, and the payor's name & SS# to confirm his/her credit score. The investor will give you a checklist of documents they need.

The purpose of providing this information to the investor is simply to prove that all of the preliminary information they based their offer off of is all accurate. Even if I told you how fancy and clean a car was that you wanted to buy, you'd probably want to see it first. The same idea applies here. Note investors don't shop blind.

2) Provide information quickly. I have seen deals drag on for nearly a year simply because the note holder failed to show the buyer the information requested for due diligence. Don't let this happen. If you want to get paid for your paid, keep in mind that time is valuable.

Some note holders attempt to obtain proof of funds from investors before providing any documentation. This is unethical and investors don't have any reason to meet such requests, and the example above regarding the car is relevant to this issue as well. The most a hesitant note holder can expect to receive without providing any documents is a Letter Of Intent (LOI) with plenty of conditions included for the investor's protection.

Save everyone time and keep this in mind when you plan to sell your promissory note.

3) Expect a discount. Countless note holders believe in a mythical note investor who will pay them the full balance owed on the note in order to purchase it. Although many buyers and brokers, myself included, work until they sweat in order to obtain aggressive and generous bids, they are always and will always be discounted from the present note balance.

Note investors want to invest their money and expect a return. If this is unappealing, unfair or a rip-off through your eyes, your best bet is to simply keep the arrangement between you and the payor the way it is until you have received every last payment. Your only chance of decreasing the hit you take is to structure the note properly to increase its appeal. See the article "Key Factors in Structuring Promissory Notes" for advice on that.

4) Make sure the preliminary information you provide is as accurate as possible. If, for example, you provide a note that us supposedly a 1st position mortgage note worth $200K with a payor whose FICO is 780 and then you send over the documents and they say it's a 2nd position mortgage note worth $20K with a payor whose FICO is 580, then the preliminary bid is obviously going to change.

Some note brokers and buyers fail to explain to their clients that releasing preliminary information results in a preliminary bid, subject to due diligence. Be ready to verify everything you say to be true about your note or anticipate a steeper discount.

5) Confirm the job title of whoever you are working with, as well as their level of experience in the cash flow industry. Some brokers pose as buyers, while shopping your note around the internet. Some brokers exaggerate their experience, when they really can't even translate the terms of your note back to you.

A simple way to find out if you are dealing with a novice or veteran of the business is to act confused about something, whether it be the function of a balloon payment, why a payor's credit score is relevant to a note investor, or which is more attractive to a note buyer: a 5 year note or a 10 year note and why?

My article: "Key Factors in Structuring Promissory Notes", will help you in quizzing the person you are dealing with. If they need to hang up and call you back to get an answer, or they stutter as if you asked them the meaning of life, then you know you need someone with more knowledge. Putting the broker/buyer in the hot seat may seem like a dishonest tactic, but you owe it to yourself to sift through those who are dishonest in order to find those who will tell you the truth. Failing to do this means that if you receive nothing but lowball offers as a result, the only explanation will be your negligence.

Also, just try telling them bluntly that you will walk if you discover they are not who they say they are (i.e.: different name, broker vs. a buyer, etc). Usually most secrets are spilled right before closing, but most brokers will comply if you warn them you will not tolerate lies.

6) Understand what each contract is for and who it affects. A unilateral contract is only binding to one of the parties in a deal. A bilateral contract is binding to both parties. Please note, other contracts may be used, but these are standard in pretty much every transaction.

-A Non-Circumvention/Non-Disclosure agreement (NCND) is used to prevent people from going around each other in transactions without consent. It also protects the privacy of the information being exchanged, ensuring that the parties involved in the transaction will be the only ones to view the information. This contract is bilateral.

-A Commitment Letter is a note holder's written agreement to sell their note for a particular price. This is unilateral; only binding to the note holder. This agreement is between the note holder and whoever brought them the offer.

This is not to be confused with a Purchase & Sale Agreement, which is a bilateral contract between the investor and the note holder.

-A Purchase & Sale Agreement is a bilateral, legal contract which obligates a seller to sell and a buyer to buy a specific product or service for a specific price on a specific date. Most often associated with real estate transactions, they are also used in the sale of notes.

The reason this contract is one of the last to be signed is because a lot can occur during the due diligence process which may affect the deal. Only when both parties are absolutely certain they can proceed will this be signed.

-A Letter of Intent (LOI) outlines an investor's intent to purchase a particular instrument for X-amount of dollars. If used, this contract is typically given to the note holder after an offer is accepted and before documentation about the instrument is released. Due to this, the investor often times includes clauses and conditions that allow them to rescind their offer for their protection.

This agreement can be both unilateral and bilateral, depending on the circumstances.

-A Payout Agreement is a short, unilateral contract that obligates the investor to pay the broker X-amount of dollars in the event the deal with the note holder closes.

7) Confirm that each offer you receive for your note are Net Offers. This means that no hidden broker fees will be deducted and the amount you are being offered is the amount you will be paid at closing, or pretty close to it.

8) Investors determine which Closing costs they are willing to pay for, if any, after each document from the checklist has been received and reviewed. Your net offer is technically a gross offer because of this, so understand that you may have to pay for some of the costs.