Here is something you might not have thought of…There’s not just one single item that determines the value of your real estate note.
It’s actually a combination of multiple variables including payment terms, interest rate, equity, property type, the buyer’s credit, and note seasoning. That last one, note seasoning, might sound a little cryptic, but really breaks down to being one of the biggest potential performance indicators.
What is Note Seasoning?
In note buying, ‘seasoning’ refers to how long payments have been made on a note.
Think of it as a note’s experience factor or reputation. An investor will look at indicators like:
- How long the buyer has been making payments
- If the buyer has paid late or missed any payments
- Whether payments are verifiable.
What does it mean when payments are verifiable?
When payments are collected by a third party, it provides proof of payment from an independent neutral party. This might be an attorney, a servicing company, or an accountant.
But, what if a third party isn’t used to collect and verify payments?
Then sellers need to keep a copy of the check, or money order received. Additionally, keep copies of the deposit slips from the bank. Less is not more in this case. If it proves payment, keep it.
Along with payment histories, maintain regular records showing date and amount received, principal and interest application, and the unpaid principal balance. This will go far in showing the stability of the note. For more details check out our article on How Payment Histories Increase Note Values.
How Does Note Seasoning Work in Real Life?
The general rule? The longer, the better, with 12 or more months being the ideal.
Important to note—that is 12 months of payments in a row. A sporadic history (for example 12 payments spread over 18 months) does not carry the same value as a stable history of monthly payments with no missed payments.
However, the note still has selling potential, even with seasoning or payment issues. As mentioned, the value of a note is determined by multiple factors so this will be just one part of the equation.
Currently receiving payments on a mortgage or real estate note? Interested in finding out the value of your investment? Contact us today or fill out our Online Form. We are here to help!