Privately-held, seller-financed notes are often bought and sold on the secondary market among individual investors, as opposed to pools of loans (either performing or non-performing) such as collateralized debt obligations (CODs) which are sold by banks as securities to large hedge funds or accredited investment firms.

Note investing is the buying and holding of real estate-secured cash flows, such as monthly payments on a mortgage, as an investment which yield an income stream. Notes are often bought from the original note holder at a “discount” (less than face value) in accordance with the time value of money which increases the investor’s yield.

A real estate note, also called a promissory note, is a ‘promise to pay’ a specified purchase price for real property according to its terms. The note spells out the terms of payment (i.e. interest rate, monthly payment amount) and is secured by a mortgage which specifies the underlying collateral.

Note buying means purchasing the rights to receive future payment streams (i.e., monthly mortgage payments) according to the terms of a real estate- secured mortgage note in exchange for a lump sum of cash. The seller of the note (usually the originator) receives cash while the buyer receives the remaining principal and interest payments.

A note specifies the terms of payment, i.e. purchase price, interest rate, frequency and number of payments to be made. A note and a mortgage (or trust deed) usually go hand in hand, although they are separate instruments. The mortgage names the collateral (usually the property being sold) which secures the note in the event of default.

A note broker locates people who are holding (collecting payments on) real estate-secured mortgage notes and refers them to cash buyers (note investors) who will purchase the note for a lump sum. The broker makes money by adding a referral fee onto what the investor offered before quoting the note seller.

There are training programs and certification courses available for note brokers which can go a long way towards getting you started properly. A successful note broker must be able to create consistent deal flow through effective marketing to potential note sellers. The broker then refers motivated note sellers on to interested note buyers.

The note broker makes money on the difference between the total price the note buyer offered and what the broker quoted the note seller. For example, If the note buyer offered to pay $20,000 for the note and the broker offered $15,000 to the note seller, the broker’s profit would be $5,000. Separate checks are then cut at closing.

Private note holders can be found by researching the public records. From there, direct mail can then be utilized effectively to reach them with your marketing message. Networking with attorneys, accountants and financial planners can also be an effective longer-term marketing strategy, since many of their clients may be holding notes.

When the broker receives a response from a motivated note seller, he submits a quote request to a note buyer along with pertinent information about the note (terms, collateral, unpaid principal balance, asking price, etc.). If the buyer elects to quote and the offer is accepted by the seller, the deal closes and the broker earns a fee.

Note buyers can be found through internet search, social media networking, joint venture agreements, note industry meetups, or broker programs put out by institutional note investors. Additionally, private note holders will be solicited directly through mailings from note brokers who obtain note holder information from public records.

Assuming a 1st position seller-financed note, 80-90% LTV, depending on borrower credit, seasoning, terms, etc., broker fees can fall anywhere between $2,000- $10,000, assuming an average investor buy range of somewhere between 0.70- 0.80 cents on the dollar. Some experienced brokers can average $5,000 per note transaction.

A note exchange is an online marketplace for note buyers and sellers that provides a platform for facilitating transactions. Available notes are listed by sellers for the purpose of soliciting offers from interested buyers. Any offers, as well as subsequent acceptances responses, rejections, etc.  are then routed back and forth through the website API.

There are several ways to facilitate a note transaction online. Among them, note exchanges such as Paperstac or FCI Exchange offer platforms for sellers to list mortgage notes for sale. Prospective buyers can then review available notes and submit purchase offers through the site on those notes which meet their investment criteria.

Note buying training is available through books, courses, seminars, investor meetups, JV (joint ventures) as well as business opportunities that teach note brokering as a discipline. Some offer step-by-step guidance throughout the various stages of the note purchase, providing hands-on experience for the investing side of the business.

Real estate notes can be excellent investments, depending on the investor’s yield, the  equity position in the underlying mortgaged property as well as property type and location (judicial vs non-judicial foreclosure states have different rules), pay history on the note, number of  delinquent payments, if any; creditworthiness of the payor, terms, etc.

Notes can be found by networking with other investors, through direct mail lists of note holders obtained through public records, or online note exchanges, which list potential sources of notes for sale. Note sellers can also be found through referral sources such as attorneys, accountants or financial planners who may have note holders as clients.

Whereas real estate investing involves the buying and selling of real property, note investors deal only in the underlying paper, specifically the mortgage note.  The investor is buying only the payment stream on the note, thereby avoiding hands-on property management and the attendant maintenance associated with “tenants and toilets”.

To sell your mortgage note for cash, contact a reputable note investor or broker for a quote. You will be asked for specifics on the note such as original loan amount, present balance, terms and pay history as well as the underlying property type and location. Most buyers will quote a discount off face value using a time value of money calculation.

Performing notes are notes on which all payments are current, whereas non-performing means there are delinquencies in the payments. Non performing notes held by banks tend to be charged off as losses after a period of time, and subsequently sold off in large pools to hedge funds or other investors at substantial discounts.

Note holders in need of cash may be willing to sell their note to an investor for less than what is owed in exchange for a lump sum, instead of waiting months and years for the remaining future payments. The note buyer performs due diligence, weighs risk vs. reward, determines the desired yield, then structures the purchase offer accordingly.