When you own a note, you are acting like the bank. You are the one receiving the payments. If something needs fixed the owner has to do it. And like the bank, you also have the right to take the house back in the event of non-payment. To make the situation even better, you can structure a transaction so you are not owed anywhere near the value of the property. Known as Investment-to-Value or ITV, investors can decide how much to invest and what portion of the remaining monthly portions to purchase.

This transaction in Pineville Oregon is a great example of structuring a win/win for all parties. Unable to obtain bank financing due to the property type (older single wide mobile home on acreage), the seller agreed to take back a note for the buyer.

• Sale Price $120,000
• Down Payment $ 7,000
• Original Balance $ 113,000
• Terms: 9.5% interest, $987.28 per month, 300 month term

The sellers, being of retirement age, wanted something more than monthly payments. After closing, they sought to sell the remaining payments but the buyer had very little equity on a hard to finance property. To limit the exposure a lower ITV was necessary. A partial purchase was a natural fit but due to the seller’s age they didn’t want to wait to receive payments on the back-end.

The solution? A split payment partial purchase letting the seller continue to receive a portion of the payment each month and a lump sum of cash.

• Amount to Investor Each Month: $778.21
• Amount to Seller Each Month: $209.07

Buying a portion of each monthly payment provided a return on investment of 12.5% yield in an asset backed by real estate.

A third party escrow company serviced the note payments. Each month they collected the whole payment from the buyer ($987.28 per month) and then split the disbursement between the seller and us as the investor ($209.07 to the seller and $778.21 to us as the investor).

Later this note went into default making us very happy to have a lower ITV. We were able to resale the property to a new buyer (using owner financing of course) and agreed to continue a similar monthly payment split with the seller.

The new buyer eventually paid the note off early when they obtained a bank loan to build a new home that qualified for conventional financing. We like early payoffs! Due to the time value of money accelerated payments increase your yield as an investor (but more on that in a future deal).

Let’s talk Note Investing! Most of us learn best through real deals. This is Day #3 of sharing a deal where we can review, dissect and analyze note buying strategies.