A Knowledge Based User Friendly Approach

Real Estate Notes

San Francisco Real Estate

How Can I Help You?

If you own a real estate note, or know someone who does, I can help you sell that note. Whether your note is secured by a mortgage or trust deed on a residential or commercial property, and whether payments are timely or in default, I will work to structure a winning solution to purchase your note. You will receive a lump sum of cash for your future payments.

If you are familiar with the note business, request a quote, and I believe you will be pleased with the results. If you are new to this business, realize that all notes are sold at a discount. Keep in mind that most note buyers don't want notes behind first position, and many buyers don't want defaulted notes. But if we work together, we may make a deal where others won't, or don't know how to meet your needs.

A key factor to realize, is that whoever puts their money behind the deal will want complete, accurate information. If others don't ask you much, and make a lot of promises, the deal probably won't close as they say it will, or won't close at all. By asking more questions, I strive to produce a better result for everyone involved.

Partial Sales Add A Tailored Dimension

More real estate notes are sold in part than as the sale of the whole note. Consider a 240 month note, where you have received 24 payments, and 216 remain. You don't have to sell all 216 payments, and a note buyer may not want them. Much more could be written on this topic. Let's look at some basics.

For starters, consider that a partial note sale is a good deal for the note seller, even if you know nothing about this concept. A real estate note buyer may not want to invest in a 216 month note, because it will take longer than they want to get their money back. As market conditions change, a note buyer may only be interested in purchasing 60-120 payments. Or some other number depending on the buyer. Beyond their general parameters, a note buyer may have specific concerns about your real estate note that restrict the number of payments they are willing to buy. Even though this may not be what you planned on, you may like it, or even prefer it.

When you sell part of a note, you receive all the payments prior to selling the partial, you are paid a lump sum of cash for the partial, and you receive the remaining payments after the partial. Should the note go to full term, you will receive more money over time than the balance of the note was when you sold part of it.

Using the example I started above, a note for $100,000, at 8% interest, for 240 months, would have a monthly payment of $836.44. After receiving payments for two years, you have the need for some cash, and consider selling your note. Depending on the other characteristics of your note, a decent price for a full sale (216 payments) could be about $72,000. If instead you do a partial sale of 72 payments, $38,500 could be reasonable. After the note buyer is paid the 72nd payment, you would receive the remaining 144 payments, or $120,447.37.

Whether you like the whole sale or the partial depends on your situation. If you need $70,000, selling the whole note may be your answer. You may also prefer the full sale if you didn't want to collect payments to start with, but had to in order to sell your property. Or perhaps you no longer want the responsibility of collecting payments and the associated risks.

If you don't need as much cash, the partial sale in this case is attractive. Keep in mind that I can help you structure the partial sale in different ways to meet your needs. Also, if you make a partial sale, you have the opportunity to sell all or some of the remaining payments at a later date.

Are You Considering A 1031 Exchange?

If you are good news. A 1031 Exchange can be done in conjunction with a seller carry back note. In some cases the 1031 Exchange and a seller carry back note may be combined to acquire or sell a property. Later if you no longer want to acquire another property, carrying a note provides an option to still defer taxes. I suggest you review "Seller Carry Back Notes and 1031 Exchanges."

For those who are unfamiliar, a 1031 Exchange is based on Section 1031 of the Internal Revenue Code. It allows businesses and investors to sell a property and reinvest the proceeds in a like-kind property of equal or greater value, while deferring taxes indefinitely. This includes depreciation-recapture taxes, federal capital gains taxes and state capital gains taxes.

The introduction to the IRS code reads: "No gain or loss shall be recognized on the exchange of real property held for productive use in a trade or business or for investment if such real property is exchanged solely for real property of like kind which is to be held either for productive use in a trade or business or for investment."

Here are some of the key points:

  • The use of a qualified intermediary, a 1031 specialist, is essential.
  • The property being sold is known as the relinquished property. For the proper paperwork to be used, you must decide before the sale whether you will do a 1031 Exchange. The transaction must be structured as a 1031 Exchange, not a sale and purchase.
  • Upon closing the sale of your property, you have 45 calendar days to identify potential replacement properties and 180 calendar days to close on the replacement property(s).
  • In order to avoid paying taxes on your sale you need to reinvest your full equity . But you are not restricted to doing things just this way.
  • Effective January 1, 2018 the Tax Cuts and Jobs Act amended the Internal Revenue Code of 1986. Section 1031 now applies only to exchanges of real property and not to exchanges of personal property or intangible property. Be careful about this change. You will find well written materials about 1031 Exchanges that have not been updated to reflect this change.
  • To develop a better understanding of 1031 Exchanges, read "Introduction to 1031 Exchanges" with links to other helpful resources.

Additional Considerations

For those property owners who like to use 1031 Exchanges, you may reach a point where you don't want to get involved with a replacement property. Seller financing and installment sales provide a way at that point to still defer taxes.

Keep in mind that when the entire principal balance of the note is paid off and received by you, the entire income tax liability would be recognized. If your note gets paid early you would face this obligation so you need to be prepared for it. You may be advised to include a prepayment penalty in the note. However a note buyer typically would have a different perspective. So if you might sell the note, make sure that the prepayment penalty ends before the time you offer the note for sale.

1031 Exchanges require proper legal, tax and financial advice. Please consult with competent advisors before doing any 1031 Exchanges.

How To Sell A Real Estate Note

For the steps outlining the process of selling a note here is a link to the section of my Home Page titled The Process. The information above provides more clarity about the choices you can make over time, that lead to the eventual sale of a note. The links below will help further depending where you are in the timeline of creating and selling notes.

To get started now, please submit a worksheet, and I will start working to produce a deal for you.

Helpful Resources

Do You Have A Mortgage Note For Sale?

Owner Financing Will Put Money In Your Pocket

Dodd-Frank Act Flowchart

Dodd-Frank And SAFE Act Considerations

Commercial Real Estate Notes Get The Job Done

What Are The Tax Implications of Seller Financing?


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