Note buying is especially prevalent in real estate. Suppose a seller sells his house and takes a certain amount of down payment and for the rest of the amount he accepts monthly payments till the time the due amount is paid off.
Take the case of a house which is available for sale for a price of $100,000 and for which the seller accepts a down payment of $25,000. For the rest, he agrees to accept a monthly installment of a certain fixed amount from the buyer.
Now consider a situation where the seller is in an urgent need of liquid cash. It is here that note buying comes into the picture. The seller can contacts a note buyer to whom he can sell the promissory notes. These promissory notes refer to the monthly installments, which the buyer of the house has to pay.
The buyer will now pay the installments to the person who has bought the promissory notes from the seller of the house. The seller can sell all the promissory notes, or a part of them, with an agreement that all or the partial fixed (in case only part of the promissory notes have been sold) mortgage payments would go the note buyer until the debt is paid off.
There are other ways also on how notes work. The seller and the note buyer can also decide to divide the monthly installments between themselves. The option, which the seller chooses, will depend upon the urgency and the amount of his or her cash requirements.
There are certain fixed standards upon which note buying is based. First consideration is the outstanding balance and the period of time until the value of the note materializes. The value of property is also taken in to consideration.
There are many companies, which buy mortgage notes in exchange for a lump sum payment. The process is very simple. The promissory note holders put their notes on bid. The investors review these notes and ensure if they fit in their portfolios. Then they bid on those, which are of interest to them. At the end of the deal, the investor gets the notes and the seller the payment.
The process of note buying and selling also involves additional fees like transaction fee, appraisal fees, tax certificates, and escrow fees. This additional fee is allocated between the seller and note buyer during the contract phase of the transaction.
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