What is Note Investing?

8 Replies

hi everyone, im curious what a note is? ive seen around BP forums and podcasts talk about Notes for investments; I haven’t understood them. If anyone can help thanks.

@ChrisSeveney once the promissory note is paid, that property is yours? Can anyone get Notes?

“Note Investing” is when an investor purchases an existing loan or debt from the original lender. For instance, if the seller of a property finances the purchase of their property for the buyer, the seller acts as the lender (rather than a bank or mortgage company) and a Note and “security instrument” (i.e. Trust Deed, Mortgage, Deed of Trust) are created at the closing. The note contains the repayment terms, such as interest rate, term, payment amount. The security instrument secures repayment of the note by providing remedies (foreclosure) in the event the note goes into default (usually through non-payment). The security instrument is recorded in the county records and creates a lien against the property. These notes are assignable by the seller/lender, so a note investor is one who would purchase the note (usually at a discount) from the seller/lender in order to receive payments from the buyer/borrower/debtor.

@ScottWinn thanks for the information it has been cleared up a little; got lots to learn.

@Francois Acosta   

A note is a promise to pay.  

There is someone making payments and someone receiving payments. 

When you purchase a note you are buying the right to receive those payments (plus any interest owed on the note). 

The note can be secured by something.  That something is what gets taken away if the payments aren't made.  

Most notes discussed here in Bigger Pockets are backed by a lien on real estate.  

That lien is recorded in the county and is usually a Mortgage or Deed of Trust (there is also something called Contract For Deed but that is a story for another day).

When you buy the note you get an endorsement to the note and an Assignment of the lien. 

You now "become the bank" and have the right to collect the payments and the interest.  The person making the payments owns the property and is responsible for its upkeep along with paying taxes and insurance. If they stop paying you can foreclose and take the property back.

Investors that want cash flow and interest income target performing notes (less risk)

Investors that want higher returns and/or the chance to own the property buy non performing notes (more risk)

Before buying notes learn all you can about documentation, due diligence, servicing, and any applicable regulations.

@TracyZ thanks very much, I understand (:

@Francois Acosta if it helps perhaps you have a car loan, student loans, a mortgage etc. That means you're paying someone somewhere on a regular basis on an agreed upon schedule and rate. That promise to pay on that schedule and rate is described in a promissory note. That note can be bought and sold such that your payments would go to whoever holds the note. 

as a follow up .. there are many kinds of notes that are sold to investors..  however this being a real estate site that's the one we focus on.. nothing to add to those above.. although you can also be involved on the front end at the time the note is origanted.. does not always have to be after the fact. You end up in the same position beneficiary of a debt obligation.

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