When a buyer of a real estate property has no sufficient money to pay for the property, a promissory note is executed. In note investing, the note will serve as a promise to fulfill the obligation based on the contract terms.
Note investing is a good real estate strategy which can give you good returns. However, in making a note, you must comply with legal requirements depending on each State.
Here are the guidelines in making the best note possible:
1- Know the characteristics of a best note
In creating a note, you must make sure that there is a good down payment and a good loan to value (LTV). The down payment must be at least 10% minimum and the good loan to value (LTV) must have at least a minimum of 20% equity.
2- Position yourself in the buyer’s shoes
Both private and institutional investors can buy notes. Considering this fact, you must situate yourself in the perspective of a buyer. You need to have a picture of the buyer’s expectations and draft the terms where you can meet halfway.
To help you in arriving at a reasonable term, here are the things that note buyers usually look for:
- High Interest Rate
- Low loan to value (LTV)
- Good down payment
- Good property condition
3- Hire professionals and sell your note
A note drawn by a real estate attorney is important to assure that the legal requirements are complied with. The professionals that you can hire are Residential Mortgage Loan Originator (RMLO), Attorney, title company and Note servicer. In selling a note, the sale price is based on Note Value, not ARV. It is advisable to sell at 90% of UPB (Unpaid Principal Balance) based on max LTV of 80%.
Kristin Gerst has been a Real estate investor since January 2005. She has invested in multi-family and single family real estate projects. Her professional experiences include acquisition, design, rehabilitation, flips, owner financing, mentoring and investor consulting.
Steve Liang is the Co-founder and CEO of Real Estate IQ. He is a national speaker and a member of the Real Estate Advisory Board of North Lake College. Some of his achievements include being the REIQ’s Market Leader in Real Estate Intelligence Augmentation; co-founder of Real Estate Deal Finders Meetup, which hosts over 20 monthly real estate networking and deal-finding training in Texas; and a goal-setter and motivational speaker that helps entrepreneurs to unleash their potential and achieve their goals. Steve has spent most of his career practicing leadership, management, marketing and strategy execution.