Most people sell a note once in their life. That makes it easy for a bad buyer to take advantage. The good news: the warning signs are easy to spot once you know them.
I buy notes, so take this with that in mind. These are the same things I'd tell my own family to watch for.
Short version: Never pay upfront fees. Be careful with a quote far above everyone else's. Make sure a title company or attorney closes the deal. And get the offer, and what can change it, in writing.
1. They want money upfront
A real buyer pays for their own title search, property check, and closing costs out of the deal. If someone asks you to pay an "application fee" or "appraisal fee" before closing, walk away.
2. The first quote is way higher than everyone else's
Some buyers quote high to win you, then cut the price after you've spent weeks on paperwork. It's called a retrade.
If one quote is far above the rest, ask: "What would make this number go down?" Get the answer in writing.
3. The price drops at closing with no new facts
A fair buyer's price can change if they find something new, like a lower property value or missed payments. It shouldn't drop for vague reasons the week of closing. Ask the buyer up front what they'll check and what could change the offer.
4. They want your original note before they pay
Your original note is the proof you own it. It should go to the title company or closing attorney, who holds it until you're paid. Don't mail it to a buyer before closing.
5. There's no title company or attorney
A real closing uses a neutral third party. They make sure the money and papers change hands at the same time. If a buyer wants to "keep it simple" and skip that step, don't.
6. They can't show proof of funds or past deals
Ask how many notes they've bought. Ask for a reference or reviews. A real buyer has a track record. Some "buyers" are brokers who shop your note to someone else and keep a cut.
7. They pressure you to decide fast
"This offer expires tomorrow" is a sales tactic. A fair offer can wait a few days while you think. If you have a real deadline, that's different. But the pressure should come from you, not them.
8. They won't explain the numbers
Ask how they got to the price. A good buyer can explain it in plain words: the payments left, the risk, the equity, and the costs. If they won't, be careful.
9. They don't care about your payer
Ask how they'll treat the payer. Who will service the loan? What happens if the payer has a hard month? A buyer who brushes this off may be quick to foreclose. Read what happens to the payer when you sell.
Questions to ask any note buyer
- Are you buying the note yourself, or brokering it to someone else?
- How many notes have you bought?
- Are there any fees I pay?
- What could make your offer go down?
- Who closes the deal? A title company or an attorney?
- Who will service the loan after closing?
- How long does closing take?
- Can I talk with someone who sold you a note?
Brokers aren't always bad
A note broker connects sellers with buyers. Some do honest work. But a broker adds a layer between you and the money. If you're working with one, know it, and ask how they're paid.
How I do it
You get two written offers: the whole note and a partial. I tell you up front what I'll check and what could change the number. There are no fees for you to pay. A title company or attorney closes the deal. You can read reviews from people who sold me their notes.
Frequently asked questions
How do I know if a note buyer is legit?
Check their track record, ask for reviews or references, and make sure a title company or attorney closes. Never pay upfront fees.
Should I pay a fee to get my note appraised?
No. A real buyer pays for their own due diligence out of the deal.
What is a retrade?
It's when a buyer cuts the agreed price late in the process, often without a good reason. Ask up front what could change the offer.
Should I get more than one quote?
Yes. But compare the buyers, not just the numbers. A fair offer that closes beats a high one that falls apart.
Is it safe to send my original note to a buyer?
Only to the title company or closing attorney handling the sale, not directly to the buyer before you're paid.
Ready for an honest number? Get two free offers.
Larry has invested in real estate since 2006 and has bought more than 300 mortgage notes. He runs LJH Investments, LLC, an Ohio company based in Madison, Indiana. More about Larry
This article is general information, not legal or tax advice. Laws change. Talk with your own attorney and tax adviser about your situation.