How do Notes work?

7 Replies

Hello, I have come across a few investors who are in the Note buying business, each has given me a different description of what this is, some talk about real estate securities, some others are straight hard money and call it note buying so I'm a little confused on this topic. Can anybody clarify how how the Note buying process works??



I've never dealt with it personally but just imagine you're the bank.  When someone pays their mortgage or loan etc they're paying you since you control the note...unless of course you pay a servicing company to collect the payments for you.

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In a simplistic nut shell, people finance investors, or people sold their house and who took back owner financing (a deed of trust or mortgage) and a "note" will sell their future cash receipts for a lump sum. Not an endorsement, but more for education, see also and types like ... or of course with 'note buying' or 'note buying tips' in the search bar.

How it works: Note buyers (note investors) will buy the note from people who hold the note (e.g. the people who sold their house on 'terms'). Once sold, the person paying the note will direct payments to the new note owner....

Lenders originate loans and an agreement is made in a promissory note. A promissory note is a promise in writing to pay back the lender from the borrower with all the details of the agreement (ie who owes who, the loan amount, rate, term, etc). This promissory note is secured by a recorded instrument on the title of the property being used as collateral for the loan.

Basically a Note is an IOU, whoever owns the dept, the IOU, is able to sell it. 

Some notes are performing, meaning that the borrower is current with paying the agreed upon terms. OR there are non performing notes, meaning the borrower has defaulted on the terms of the note. 

Just like all real estate people invest differently in notes. Some buy high interest performing notes, or some people like buying non performing notes.

This is very general info, if you want more info please contact me, or read on like suggested above! 

Best Regards

Hi, Rafael,

There are as many ways to invest in notes as there are ways to invest in properties. You can invest in SFRs, multi-families, apartments, commercial, land only, etc. The same goes for notes - you can invest in performing notes (think bonds), non-performing notes, 1st liens, 2nd liens, tax liens, etc. The APR for each class and type varies depending on several factors including risk, discount, etc.

Dave Van Horn's podcast below is a great place to start!  Be careful - notes can be addictive.  You've been warned.

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