My recent realization about notes

13 Replies

In the past year or so I have been increasingly interested in leveraging discounted notes to diversify my portfolio. I prefer 1st position notes but certainly understand how others like and do well with 2nds.

Initially the concept was very foreign and I often thought 'wait, so I am buying someone elses debt and playing the role of the bank?" Well, yeah, and now I am super comfortable with this notion.

The point of this post is not how I eventually became OK with the concept but rather a realization I had after many discussions with friends, family and colleagues and a recent event (more on that in a second)

What I noticed is that the most confused were people under 40 and in urban areas (I live in Los Angeles area). This concept was very foreign.

When I explained notes to people above 50 and/or in rural areas the concept of Private Financing/Seller Carry was crystal clear.

Then, 2 weekends ago, I was cleaning out my grandfathers house as he recently passed. I came across a box of old papers and went through them to make sure his SSN was not on anything. What I found was that the past 3 houses he sold (he moved his primary property as he migrated further west with his job) were all seller carry situations and he would by the next place with cash.

My grandpa (who passed in Jan at age 99) was not a real estate person at all, this was just the obvious way to sell property. He had been selling property this way his entire life and likely never thought a thing about it. I then realized why older and/or more rural people are used to this. It happens all the time and was the norm for farms and rural land for many years.

I am sure this point has been made somewhere before and probably in a book but it just dawned on me...this was the norm for hundreds of years before commercial banks were able to merge and grow and own 'everything' in the country

Anyways, nothing earth shattering here but thought I would pass along. When explaining notes to my wife just recently I was able to talk about my grandpas transactions and it seemed to immediately convert her thought from 'this is abstract' to 'ok, I get it, this has been done forever, forget the banks :)'

Very interesting! I wonder to what degree you are correct.

That is an interesting historic point.  It makes perfect sense.  Thanks for sharing!


I'm also looking on notes investing as it's becoming tougher to find deals here in SoCal now.


Thanks, Brian, for sharing this good thought. The older generations did not have computers, cell phones, financial calculators, ...etc, but they had a lot of common practical sense and deeper understanding of life matters.

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Originally posted by @Raif Ishak :

Thanks, Brian, for sharing this good thought. The older generations did not have computers, cell phones, financial calculators, ...etc, but they had a lot of common practical sense and deeper understanding of life matters.

That's my thought as well. As I mentioned, I have no idea if my realization is a reality or not but it sure feels that way.

Since this post I asked other grandparents(85+ yrs old) and every one of them has done a seller carry. Tiny sample set for sure but interesting. I then asked my parents, wifes parents and some neighbors (55-65yrs old) and they all said no, they had never needed to do it. I don't feel like I have to ask my friends (30-40 yrs) as they will just ask for clarification on the question ;)

@Brian Larson

  Many times in rural markets or down or tough to sell markets this is the only way to sell property

@Darren Eady

  the notes you mention are not something most banks will do.. so there is a void. plus the asset class is one that banks shy from.

It's true @Jay Hinrichs.  It's why I started working in that niche five years ago.  Banks didn't want to touch the low loan amounts, but borrowers needed the money and note holders loved the loan price point.

As an interesting detail to your post early mortgage contracts date back to Mesopotamia and Babylon.  So we are talking like 3,000 years BC or over 5,000 years ago.  It is speculated that writing was born from the action of lending but I will leave that for the scholars.  

Much of our modern mortgage concept traces back to the middle ages right after the Roman Empire collapsed.  Necessary ideas of fairness and redemption directly come from those periods and legal battles of the time which are found in our laws today.  

America has always had a type of mortgage.  Our mortgage market went through cycles of expansion as our banking system struggled.  The general idea the public has on finance is closer to our mortgage market expansion in the 1940's and 1950's.  The type of finance found in "It's A Wonderful Life", you know the holiday movie.   Today we finance or capitalize mortgages a bit different with our secondary market and securities.  Lot's of influences along the way to get to where we are now and how we operate.  

This post is a cool reminder that we have viewed property ownership in a different manner in the past than we do today.  Land ownership had great influence in our country's upcoming.  Life wasn't always about living in the metro-plex and going to a supermarket for proteins and vegetables.  

I will add to you small sample size Brian Larsen. I am 76 years old. When my parents sold some farmland in upstate New York they carried the mortgage. When my husband and I sold our first house in Torrence California we carried a second. To me it was the easiest free money I had ever had. I have been interested in real estate ever since.

Yes, us hillbilly's have been doing seller financed deals since we traded blankets with the Indians for "leasing rights". The Chinese used leather pieces with markings to prove a debt and account for payment way before the immigration flow that began in 1776. :)

Prior to '39, you remember that year, when George Bailey was making loans out of the co-op farm and loan, that was about the only way rural properties could be financed unless they went to Mr. Potter, the predatory Simon Legree types that would tie up Polly on the train tracks to get the deed to her property. 

Then came the FHA, Farm and Home Administration who's purpose was to provide mortgage financing in rural under served areas of the country. Today, USDA has taken over much of that niche, leaving the affordable housing market with FHA.

Mortgages were traded and secured by bonds partly out of the Securities & Exchange Act in '39, the formation of banking reform under Roosevelt. Folks couldn't come up with money to buy those dust bowl farms as families fled away, banks wouldn't touch them as they were deemed worthless but some bought them and scratched a living out of the dirt. Seller financing was the only way you could buy a place in many Midwest areas. It was either seller finance or walk away.

You'll find too that the lease-option and contract for deeds go back to this era of real estate financing as well. 

While it has become more complex and sophisticated, the basic concepts remain the same. 

You'll find tons of seller financed transactions in small commercial, mom and pop sell the Dairy Queen because financing is too difficult for buyers to obtain. Seller financing fills the gap as it has for hundreds of years in the US.

Those with grey hair are more likely to know, they don't have an app for that yet! :) 

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Great story and a lot of the times it is the story that moves and drives us. I am a nationwide note buyer and seller headquartered in Philadelphia Pa. I am always interested in networking, expanding my knowledge and helping others.



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