A mortgage note can be bought or sold by a private individual. When you, as a private party, buy mortgage notes, you essentially become the lender on the mortgage. Whether you buy or sell mortgage notes, the mortgage note is a type of investment that allows you to earn a rate of return on your investment. The most common way to buy and sell mortgage notes is through a mortgage note broker -- an individual licensed for the state where you are buying and selling notes -- but you also may do this through a note broker company.
Buying Mortgage Notes
Contact a note or mortgage broker. Look in your local phone book or search online for note brokers and mortgage brokers that do business in the geographic area where you’re interested in investing in mortgages. Call the broker and let him know how much money you are looking to invest. The note or mortgage broker acts as a matchmaker between you as the investor and private parties or banks that are looking to sell mortgage notes.
Discuss the terms of the note. Once the broker identifies note investment opportunities for you, discuss the term of the note (number of months or years) and the rate of interest you’ll receive as the return on your investment. It is common for the mortgage notes to pay anywhere from 12 percent to 15 percent to investors.
Have a promissory note created. When you buy a mortgage note, you are establishing an agreement between you as the lender and the borrower (seller) of the note for the borrower to repay you. To make it a legally binding agreement, a promissory note should be created and signed by the seller of the note, and the promissory note should include all of the terms and conditions of the mortgage.
Create an escrow account. An escrow account is managed by a third, unbiased party in the sale and purchase transaction of the mortgage note. The note broker, a real estate attorney or a title company can establish the escrow account for you.
Deposit purchase funds. When you buy a mortgage note, you deposit the purchase amount into the escrow account. The manager of the escrow account then deals with the disbursements of funds to the seller of the mortgage note.
Receive monthly payments. You are now the holder of the mortgage note, which is equivalent to being a lender on the mortgage, which means monthly mortgage payments are made to you. The borrower on the mortgage note makes monthly payments to the escrow account and then the escrow account manager disburses your monthly funds, which consist of a principal portion and interest (which is typically the 12 to 15 percent mentioned before).
Selling Mortgage Notes
Find a mortgage broker. If you’re not new to mortgage note transactions, then you may have an existing relationship with a mortgage or note broker. If not, find a mortgage or note broker working in the state where you own the mortgage note.
Discuss the terms of the sale. Let the mortgage or note broker know how much the mortgage note is for and what the current terms and conditions of the note are. The mortgage or note broker either purchases the note directly from you and holds it as part of the firm’s investment portfolio until he finds a new buyer or matches your note with a buyer interested in purchasing a mortgage note.
Sign the sale agreement. To transfer ownership of the mortgage note from you to the buyer, a legal contract is drawn up by the mortgage or note broker, or a real estate attorney. The contract details the amount, as well the terms and conditions of the sale of the mortgage note. Both the seller (you) and the buyer need to sign the agreement to make it legally binding.
Set up an escrow account. The note broker typically sets up an escrow account, but you can also have a third party establish an escrow account. The escrow account will act as the account where all payment and disbursement actions are made. It is related to the sale of the mortgage note.
Receive your money. Once the sale of the mortgage note is complete, the sales price amount for the mortgage note that is due to you will be disbursed from the escrow account.
Kristie Lorette started writing professionally in 1996. She earned her Bachelor of Science degree in marketing and multinational business from Florida State University and a Master of Business Administration from Nova Southeastern University. Her work has appeared online at Bill Savings, Money Smart Life and Mortgage Loan.