Whether buying or selling notes, understanding the players in an owner financed transaction makes for profitable relationships. Here are the five main team members along with some standard industry terminology.
Seller – Note Holder – Payee
When a property seller accepts payments from the buyer over time using owner financing, they also become the note seller, note holder, or payee.
The payee is receiving payments on a note or contract. If the payee assigns or sells their rights to future payments to a note investor they also become a note seller.
When it comes to the legal documents, the payee is identified as the “Beneficiary” on a Deed of Trust and the “Mortgagee” on a Mortgage.
Purchaser – Property Buyer – Payer – Borrower
The purchaser buys the property from the seller. Unless they pay cash, the purchaser will also become the payer.
The payer is making payments. When property is financed with a traditional loan the payments are made to the lender. When the seller finances the property these payments are made to the seller.
The payer is identified as the “Maker” on a Note, the “Grantor or Trustor” on a Deed of Trust, and the “Mortgagor” on a Mortgage.
Note Buyer – Funding Source – Investor
When sellers prefer cash now instead of payments over time they can sell their rights to a note buyer or note investor. This funding source can be a financial institution, retirement account, private company, or an individual.
Once the investor buys the note, they notify the payer to now make future payments to them. While all terms stay the same for the payer where they send the payment will change.
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Note Broker – Consultant – Note Finder – Referral
When sellers want to liquidate a note for cash, they will often turn to a note broker. Also known as cash flow consultants or note finders, they earn a fee to act as a financial matchmaker between the note seller and the note investor.
The servicing agent collects the payments each month from the borrower and keeps track of principal, interest, and the remaining balance. They might also hold the original documents and collect reserve or escrows for property taxes and insurance.
While these are the leading players in private financing, a transaction will also involve other supporting members. These include a title company, appraiser, real estate agent, attorney, and other professionals that are a regular part of the buying and selling process.