Selling Mortgage Notes

[jimnjana]

I have a mortgage note I'm considering selling. Originally it was for 120K at 5%. It's about 6 years old with about 108K principal left. Monthly payments are $644.19. I called a firm that is offering $86,333 for the note. I'm thinking of taking it. I don't need the lump sum, would invest $60k at vanguard likely in VTI. Much of the rest would go towards a small boat cruise. I could pay for the cruise out of other savings so not really needed for that. Pros - simplify assets, reduce annual taxes, take one time tax loss. Cons - lose monthly income stream...

Anybody else grapple with this decision? Not sure where to get the best deal.
I've already contacted the payee to see if they wanted to refi, no luck. Will try one more time.

 

[njhowie]

I'm confused.

You say you don't need the lump sum, yet are willing to take a loss of $22k on what you are currently owed. Why?

How is reducing annual taxes and taking one time tax loss pro's? It's admitting defeat.

Are you concerned that the borrower is going to default? If not, I really don't see the reasoning for what you're thinking here.


Here's another thought...instead of taking the $22k loss, why don't you pay for the borrower to refinance? Tell them you'll pay for the costs of the refinance and they'll end up with a lower rate. What would that come to - maybe $5k? They may not want to refinance, but if you provide cash incentive to do it, they may have a different answer. You could even hand them $10k to do it and you're still well ahead of selling it for $22k loss.

 

[phil1ben]

I have the same issues as NJHowie. Perhaps your mortgage is a second or third mortgage on the property? If so what is the current value of the property and the current value of the senior mortgages.

If you have a first mortgage and the value of the property well exceeds your outstanding balance, not sure why you would take a discount even if you thought the Borrower may default.

 

[lakerunner]

I had a similar situation years ago. It was a first montage and the offer was very low. I turned it down and continued to collect the payments for years until the owner sold. 5% is a nice income.

 

[OldShooter]

@jimnjana, often I find Warren Buffet's thoughts to be both germane and wise. That is the case WRT your post:

"Much success can be attributed to inactivity. Most investors cannot resist the temptation to constantly buy and sell. ... Lethargy bordering on sloth should remain the cornerstone of an investment style."
​

The way I explain this to my Adult-Ed investing students is to observe that it took me almost 30 years to realize that the more I play with my food, the less food I have.

Relax. This feeling will pass.

Alternatively, if the feeling doesn't pass (), contact attorneys and CPAs that you know. They may be able to hook you up with a private buyer who will pay more for a well-seasoned mortgage. "A firm" that is in that business is almost certainly low-balling you and expecting to flip the asset to a private buyer at a profit.

 

[jimnjana]

I'm confused.

You say you don't need the lump sum, yet are willing to take a loss of $22k on what you are currently owed. Why? I think VTI will perform better than 5% a year.

How is reducing annual taxes and taking one time tax loss pro's? It's admitting defeat. I could use the tax loss this year, annual taxes on the interest are taxed at my reg tax rate, where gains on VTI are not taxed until sold, dividends are taxed at lower rate

Are you concerned that the borrower is going to default? If not, I really don't see the reasoning for what you're thinking here. No.


Here's another thought...instead of taking the $22k loss, why don't you pay for the borrower to refinance? Tell them you'll pay for the costs of the refinance and they'll end up with a lower rate. What would that come to - maybe $5k? They may not want to refinance, but if you provide cash incentive to do it, they may have a different answer. You could even hand them $10k to do it and you're still well ahead of selling it for $22k loss.

I've done this in the past year as stated will try again.

 

[jimnjana]

@jimnjana, often I find Warren Buffet's thoughts to be both germane and wise. That is the case WRT your post:

"Much success can be attributed to inactivity. Most investors cannot resist the temptation to constantly buy and sell. ... Lethargy bordering on sloth should remain the cornerstone of an investment style."
​

The way I explain this to my Adult-Ed investing students is to observe that it took me almost 30 years to realize that the more I play with my food, the less food I have.

Relax. This feeling will pass.

Alternatively, if the feeling doesn't pass (), contact attorneys and CPAs that you know. They may be able to hook you up with a private buyer who will pay more for a well-seasoned mortgage. "A firm" that is in that business is almost certainly low-balling you and expecting to flip the asset to a private buyer at a profit.

Thanks. I think this is the approach I was leaning towards. What makes it harder is watching the market go up.

 

[Sunset]

Thanks. I think this is the approach I was leaning towards. What makes it harder is watching the market go up.

Think how easy it's going to be when you watch the market go down and/or flatten for a long time.

 

[jimnjana]

Think how easy it's going to be when you watch the market go down and/or flatten for a long time.

yes, that's true...but then there is the inflation perspective too.

 

[OldShooter]

... What makes it harder is watching the market go up.

Lots of good quotations out there. Here is guru William Bernstein on retirement saving and retirement planning:

"Make no mistake about it: The object of this particular game is not to get rich – It’s to not get poor.”
​

FOMO and buying high is not a winning strategy. That's what having a disciplined AA is all about.

 

[euro]

I agree with others that there is little justification for taking such a big hit. I have a few mortgage notes too and I get daily letters in the mail from people who want to buy them (notes are public info, so they collect my address at the County registrar). So, if you really want to ditch that note, then look for "best offer". No way your first offer from a big firm is going to be the best.

 

[ERD50]

I'm also confused. Seems to me a company should be offering you a premium to take over a 5% note? Isn't that how bonds work? If I want to buy someone's $1,000 bond, and it pays 5% and isn't callable, I'll pay over $1,000 for that higher rate.

Why sell at a discount? Why doesn't the borrower want to re-fi? At least then you'd get your full principal back (minus expenses?).

-ERD50

 

[jimnjana]

I'm also confused. Seems to me a company should be offering you a premium to take over a 5% note? Isn't that how bonds work? If I want to buy someone's $1,000 bond, and it pays 5% and isn't callable, I'll pay over $1,000 for that higher rate.

Why sell at a discount? Why doesn't the borrower want to re-fi? At least then you'd get your full principal back (minus expenses?).

-ERD50

The borrower could have credit issues, not sure. I think I will send him one more email on the subject and offer more of an incentive. I wish I could sell at a premium...

 

[OldShooter]

I'm also confused. Seems to me a company should be offering you a premium to take over a 5% note? Isn't that how bonds work? ...

Lots of reasons.

1) It's not a bond.
2) It's a highly illiquid asset.
3) It's not a diversified investment.
4) There may be issues with the borrower as the OP suspects.
5) Foreclosing on a mortgage is a slow and expensive process.

IIRC there was an Argentine bond that was floated a few years ago. 7 1/8% % interest, dollar denominated, 100 year maturity. https://www.cnbc.com/2017/06/20/argentina-sees-strong-demand-for-surprise-100-year-bond.html I think you would not pay a premium for something like that even without knowing this: https://www.reuters.com/article/arg...t-crisis-with-massive-debt-deal-idUSKBN25S4HC

The borrower could have credit issues, not sure. ...

It's important to know. Your attorney should be able to run a credit check and a liens and judgments search, also check other sources.

 

[calmloki]

We have a number of contracts that drop money in a bank account for us. I'd be interested except we like the encumbered asset to be where we can drive up and see it - you are on the other side of the country. Also wonder if this is a condo or if sink holes are appearing or the expectation is that the ocean will cover it before it pays off - that sort of thing. We are also acutely aware that the cost to foreclose on someone to enforce payment is as much for a small loan as for a big one. It takes as much effort to service a $50,000 loan as a $500,000 loan - so the same amount of work can be more or less rewarding.

Not saying any of these things apply to you or your loan, just offering some of the things that could apply to your offer or to why you might want to be selling your loan.

Put me with the chorus though - you have a loan that you know real well, it is bringing in a nice return; just keep taking that money!

 

[ERD50]

Originally Posted by ERD50 View Post
I'm also confused. Seems to me a company should be offering you a premium to take over a 5% note? Isn't that how bonds work? ...

Lots of reasons.

1) It's not a bond.
2) It's a highly illiquid asset.
3) It's not a diversified investment.
4) There may be issues with the borrower as the OP suspects.
5) Foreclosing on a mortgage is a slow and expensive process. ...

Thanks, that puts it in perspective.

Though I was thinking that a big company would be buying up lots of these, so the risk is spread out. But as you say, maybe they ran a credit check (or would run one with the deal contingent on outcome), and decided this wasn't a good buy.

The OP not wanting to refi could be a sign that he knows he wouldn't qualify (the only other reason is he's too lazy/ignorant to take advantage of current low rates?). That does make him a risk for OP.

So maybe talking the loss is the safer/easier way out? It could get ugly.


-ERD50

 

[tryan]

Years ago I looked to sell a first position I was carrying .... 2 different offers were 66 cent on the dollar. I carried the note until they refi'd and got 100%. You are being offered 80 cents on the dollar .... that's pretty good (from my experiance).

 

[OldShooter]

... So maybe talking the loss is the safer/easier way out? It could get ugly. ...

Hard to say. The certain loss from bailing is around $20K. I'd expect that $20K would get a foreclosure done (and the "ugly" buffered by the lawyer), at which point the OP has the property back and can sell it at a market price. Six years of appreciation plus the initial downstroke probably provide a pretty good cushion. I think I'd sit tight unless I feared that the property would get really seriously trashed by the departing mortgagee. And even then the numbers might work.

 

[clobber]

How is everyone acquiring these notes?

 

[OldShooter]

When I was doing something similar, in our state called "Contracts for Deed," I got them from realtors who needed that kind of financing to close deals. Once the word got out that I was a buyer, admittedly small time, I got plenty of phone calls.

 

[Joylush]

How is everyone acquiring these notes?

I have a few. They are all from owner financing properties I sold to the new owners.

 

[jimnjana]

Thanks for all the input. I've decide to keep the note. Primarily because it's not in the stock market money for DW in case I kick the bucket early. To me the loss was a paper loss that I would likely make up over time in the VTI fund. The property is worth about 50% more than when I sold it. So it would likely be worthwhile to roll the dice that if we did have to foreclose in the future the lakefront lot would continue to appreciate. The monthly proceeds will continue to go into Vanguard funds and our vacation fund.

 

[kgtest]

Anyone wanna buy my 10yr 2.75%

 

[euro]

I have a few. They are all from owner financing properties I sold to the new owners.

Same here