An Investor Answers: “I Just Came Across a Note Deal. What Should I Do?”


If someone were to approach you with a new deal, would you know what to do? What if you were suddenly to inherit a note? I guess the answer would really depend on you, your situation, and your overall level of experience.

This exact scenario just happened to two different people I know. One was actually a fellow BiggerPockets member, who was inquiring about what to do in this situation.

The other was the daughter of a note investor who passed away. Her mother, who I sold the note to, was pretty familiar with non-performing notes, but the daughter really didn’t have much experience at all. It was pretty easy to help her out since I had a lot more information on the note, and we were actually able to buy it back from her.

What Do You Have and What is it Worth?

As my partner Bob says, “You are where you are.” The note is only worth what the note is worth at a particular point in time.

If it’s a performing note, it’s relatively easy to determine the note’s value once you establish the type of lien(i.e. first liens, second liens, commercial liens, etc.), the pay history, the balance owed, interest rate, and payment amount.

Also, what’s the present value of the future money stream? Jimmy Napier’s book Invest in Debt is a good tool for learning how to determine this.

If it’s a nonperforming first lien, it’s pretty straightforward. The most common exits are through the property, so what you really need to know in order to make a decision is occupancy status, FMV (Fair Market Value of the property), UPB (Unpaid Principal Balance), and the status of any back taxes, liens, or encumbrances. For example, if the property has delinquent taxes and is headed towards a tax sale, this could jeopardize your investment if you aren’t monitoring it.

Related: Diversifying into Real Estate Notes? Better Choose a Strategy! Here’s How.

On the other hand, if it’s a nonperforming second lien, it’s a little more advanced. There’s more that you would need to get clear on in order to make a qualified decision.

How to Get Clear on Your Note Deal


First of all, you would need to get clear on the administrative part of managing the note, including documentation and accounting. It’s important to make sure you have all of the necessary documents in your collateral file. Typically, this includes the note, mortgage, assignments, and allonges.

There are also a few other considerations. For example, is your assignment recorded? If this is a note that you did inherit, do you have all the proper paperwork and titling in place to settle the estate, such as a short certificate? On the accounting side, you need at least the unpaid principal balance and the last payment date applied to calculate any type of billing statement or payoff.

Risk Management

Next, there are certain things you would want to monitor as the second lien holder in order to protect your positon, the biggest one being the senior lien status. Some of the other potential risks are left more for the senior lien to monitor, including municipal liens, homeowner associations, taxes, insurance, and any other liens.

Property & Borrower Status

Finally, you may want to get clear on both the status of the property and the borrower’s situation. In regard to the property, what is it, where is it, what’s it worth, and what condition is it in? Also, is the property vacant or is the borrower still occupying the premises?

With the borrower, mainly you want to know what their intent is. For example, do they want to stay in the property and possibly create a new payment plan, or would they rather move on from it? Is the homeowner underground, as in he/she will not respond or engage in a dialogue at all?

Once you’re as clear as possible on many of these things, it’s much easier to make an informed business decision.

Exit Strategies

Although with delinquent second mortgages the most common exits are through communication with the borrower (i.e. payment plan, short sale, discounted payoff, deed in lieu, seller assist, etc.), if you have little or no experience with non-performing notes, things could become quite difficult.

That being said, here are a few options people consider:

  1. You could hire a licensed servicer, who also has a specialty servicing capability. In other words, they’ll legally collect on a delinquent asset in a compliant manner. (For example, companies like Madison Management or FCI provide these types of services.)
  2. Some folks hire or partner with someone who is familiar with collecting on nonperforming second liens. (FYI, there are people on Bigger Pockets who do this.)
  3. Others may have their attorney provide any legal services or new work out agreements with the borrower.

Of course, I’m not trying to give out legal or accounting advice nor am I telling anyone what to do. These are just some of the options available. Personally, I’d lean towards utilizing the licensed servicer in this heavily regulated environment.

Related: How to Get Started in Real Estate Notes: A Primer for Investor Newbies

So, if I were to inherit a note and I didn’t know what to do, one option would be to keep the note, follow the legal process, and hopefully come to an agreement with the homeowner. If an agreement is not possible, there’s also the option to foreclose and rent it out, recouping whatever you can or keeping it as a rental until you can sell it.

Another option is to just sell the note. Some folks market notes on places like LinkedIn groups, Facebook groups,, Note MLS, eBay, FCI exchange, and more. It may pay you to research some of these sites to see what assets are selling for, and don’t be afraid to ask around. After all, a note deal will only take place if there’s a motivated buyer and seller.

So, would you know what kind of deal you had if a note came your way?

Be sure to leave a comment below!

About Author

Dave Van Horn

Dave Van Horn is President at PPR The Note Co. - an operating entity that manages several funds that buy/sell/hold residential mortgages, both performing and delinquent. Dave has been in the Real Estate business for 25 years, starting out as a Realtor and contractor and moving onto everything from fix and flips to Raising Private Money.


  1. Bill Gulley

    Nice Dave, just to mention the “foreclose and rent it out” that depends on the type of note, equity funded or cash funded, lender’s can’t drive the repossessed car because they don’t own it, neither can they move into a property, unless it was an installment loan. Depends too on the state of what interests were conveyed under the security agreement, but regardless, a past owner has courts of equity available to them and bottom line, lenders are entitled to their money back, not profits over and above what they loaned.

    Good suggestion to get a servicer! Modification of a note is the extension of new credit, just because Sally owns a note doesn’t mean she has license to extend new credit to a homeowner, a consumer loan. A servicer can most likely achieve this and keep your note compliant, legal, collectible and in good standing. 🙂

    • Vincent Vollero

      Hi Bill,

      So after reading Dave’s response below (thank you Dave 🙂 ) I revisited your post. You touched on another question I had, and this was about legality, and the need for a license to do this kind of business. So am I understanding correctly, as long as I’m using a loan servicer, and as long as my workout agreements are within the confines of the existing note, and I am not originating a new note, I do not have to be a licensed mortgage broker? I really didn’t want to have to get a mortgage broker’s license to be in the note investing business (but I would if it were absolutely necessary). Do I have this correct?


    • Dave Van Horn

      Hi Bill,
      You’re right–utilizing a licensed servicer is really the way to go in order to be compliant.
      I agree with you that at the foreclosure sale the borrower is entitled to any excess above the mortgage owed. I was more referring to a REO (post foreclosure, post redemption periods), where the former lender (now owner) rents out or sells the property.
      Thanks for your comment!

  2. Vincent Vollero

    Hi Dave,

    Question…if you have a note (non performing 2nd) and the senior lien was current but starts becoming delinquent, let’s say 60 days, and all signs are indicating that this will unfortunately be a situation where foreclosure is inevitable. Is it true generally that senior lien holders (i.e. banks) will only start their foreclosure proceedings after 90 days of delinquency? And if so, is there any advantage as the 2nd lien holder to “beat them to the punch” so to speak, and initiate foreclosure before they do?


    • Dave Van Horn

      Hi Vince.
      Although it’s a business decision and it’s going to vary on a case by case basis, some of the factors that would lend to our decision are ones that you already mentioned, such as the senior lien status becoming delinquent. Other factors include occupancy, equity, potential rent vs. mortgage payment, etc. Regarding your other question, yes – they typically wait at least 90 days.
      I hope this info helps!

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