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Intro to Notes


Note Investing: the next big thing?
Our friends at the NoteWorthy Newsletter have graciously let us share this article with you. Please leave your comments below.

About Noteworthy: The NoteWorthy Newsletter ( )has been providing education and training to real estate investors for over 24 years. They were pioneers in the world of note investing and in using financial models for determining actual value over time of real estate and note investments. They are holding their 24th Annual Convention November 4-7. Click here for details.

Intro: Notes are hot!

Whether you first heard about note buying note brokering from the recent BULK REO hullabaloo, you’ve gotten interested in Notes because they can be a way around several of the big problems with short sales (because basically you BECOME the bank when you buy a note, so you no longer have to deal WITH the bank), or you’re brand-new to Notes, this article will introduce you to a strategy that you can use to make more money and diversify your RE portfolio.

Why notes? Why now?

The simple answer is that while note buying and brokering can be a great strategy in ANY market (as you’ll hear about in this course), it’s especially attractive today because the banks are sitting on loads of bad notes that they would often rather sell at a big discount than have to go through either a loan mod or foreclosure with. Plus, there are now lots of online note exchanges where you can buy and sell notes easily. The bottom line is that real estate investors need to be opportunistic, and there are GREAT opportunities out there now in notes.

Let’s start at the beginning…What is a note?

What is a Note? A note is simply an IOU. A payor has promised to pay someone else, called a beneficiary, some money. The payor may agree to pay interest on the money, and to pay part of it back in daily, weekly, monthly, yearly installments or in one lump sum in the future. We, as note buyers, will buy that IOU from the beneficiary (i.e. the person receiving the payments) for a lump sum of cash now. How much we will pay depends on the discount we can convince the beneficiary to take from the face amount of the note.

The discount we would demand from the face value of the note depends primarily on two factors:

  • How safe is the note? If the note is merely an IOU from an unemployed drug addict, we would demand a very, very steep discount. If the note is from a wealthy person, and if the note is secured by some kind of collateral we might not demand a very large discount. The collateral that insures the note will be paid can be a car, furniture, anything of value or real estate. If it is real estate, the note will be backed up by another document called a Trust Deed, a Mortgage, a Land Contract, or some other instrument of hypothecation. We would feel the note is safe IF (big “if” these days) the real estate or other property had a value that was larger than the value of the note.
  • What are current interest rates for other investments? If the interest rates are high on bank loans, savings accounts and T-bills, then we would demand a higher discount than if interest rates were low. For example, if someone had a loan written at 10% interest, I would offer to buy it at one price if T-Bill rates were 9%. If T-Bill rates went to 20%, I would have to offer a lower price for that 10% note. The higher the T-Bill rate the less a note may be worth. These days, notes are worth more…

Performing vs. Non-performing notes

Think of it this way: a PERFORMING note (where the borrower is paying on it) is really an income stream running into the future. The person who is receiving that income stream, the beneficiary, may find that he or she does not want the income stream, but wants or needs a lump sum of cash now. The only thing that can buy that income stream at a discount is CASH now. That is the heart of the discounted PRIVATE note industry.

For a NON-PERFORMING note where they borrower isn’t paying, you’re dealing with a different set of rules. First, cash flows are not a given (by definition), so the emphasis goes squarely back on the underlying collateral, i.e. the property that secures the note. Put differently, the an investor needs to think about other exit strategies, such as taking back or selling the property through foreclosure, getting re-fi’d out, initiating a “short payoff,” doing a loan mod to get the loan to re-perform, or flipping the note to another investor. We’ll go into these in more detail below. By the way, the seller here is USUALLY an institutional lender, not a private note holder (someone who carried back financing on a property).

Another big difference between performing and non-performing loans is that the supply of non-performing or defaulted notes out there right now is MANY times bigger than that of private seller performing notes.

This is a big point.

While the cash flow notes industry has been around for a long time, the real estate meltdown of the past few years has had the effect of elevating the buying, selling, and brokering of DEFAULTED notes to a new level simply because the banks are awash in bad paper.

In a follow up article, we’ll talk more about what a defaulted note buyer can learn from a traditional note buyer.

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Please leave your questions and comments below.

  • charles parker

    RE ashvalues are falling so fast. I just sold a $100,000 12% note for $9.000 cash, I forclosed on a $600,000 dot and I cannot sell the prop. for $300,000.

  • Real Estate Investor Website

    We have been looking for a note program. I think we’ll signup for this.



  • Michael Wiley

    Sounds like something I can do to make some real money.

  • Lynnvest

    I can’t say that I have much experience in secured notes. I believe you get the information you need just before you need it. This is great stuff I hope the door opens soon and I find I am in need of this resource information quick. Thanks REIbulletin and NOTEWORTHY

  • Rudy

    I think since 1971, when the U.S. dollar was no longer backed by gold and silver, we have all been buying notes. Every dollar printed says “note” or IOU. It no doubt is a great investment strategy to flip paper. I would encourage any serious RE investor to look into the note industry!

  • Tom D

    Be real careful with NPNs. As Charles said, RE values are falling fast. But here is what I think is a bigger issue. Many of these notes are 3 to 5 years old. Most are at 100% of whatever the purchase price was. Depending on the bank and property location, you may see discounts to 70% or more of current balance. But is that a bargain? Not when you have an original loan of 100K and the property is now worth 50K. So you are buying at 30K. Does that leave you enough room to make a profit? I deal with one bank in CA that will rarely discount their CA notes at more than 30%. At best, you are buying at retail.

  • Gabriel

    this seems like a great business, I wonder how the competition is? what is the rate of people actually selling profitable deals? i would like more information to see if this business has great potential, seems like Noteworthy has been around a long time. I wanted to ask the first responder Mr. Parker what does DOT stand for? and why can’t you sell it? thank you,

  • Jerome

    Here a story I like to share I was contacted by a investor in 2009 who ask would I be interested in buying a short sale property and that the home owner wanted to stay in the property after the purchased. The catched is I was offer a discounted none performing note instead of a short sale by the bank for 5k with a mortgage of 52k with the buyer on the mortgage of course I purchased it, and lower the home owner mortgage payment to something much more affordable, there is still 22 yr left on the mortgage,remember kids I own it free & clear, This story only get better the bank than offer 3 more NPN of similiar value all close to the same purchases price only one of them I paid a little over 7k for that a total of 4 notes for less than $25000 they all was good deals with values between 50k to 65k.I forclosure on two of them and sold the properties for a profit which of course cover all my expenses that I paid initial to purchases all of them. Now is that a real estate story or what! It all true I was in the right place at the right time , However I have not ran into a bank since that willing to offer such a sweet since nor have I purchases any notes since.



  • Marshall

    There is definitely a market out there for notes. However, you need to be very careful and not just go out and buy any note. If you are going to buy NPNs, you have to buy them a steap discounts. Big hedge funds buy performing and non-performing notes and they know what they are doing. The smart one’s require seeing the history of the note, the property, the borrower, etc. Then they price it based on the risk, not just what their return will be. Think about this… what was the borrower’s credit score going in, what was the appraised value, what was the LTV going in, then look at those same items now. What is the borrower’s current credit score, what’s the BPO value of the property, what has that done to the current LTV?

  • David

    If you have a performing note, you can hypothicate the note to generate cash, use that cash to buy another performing note, etc. greatly increasing your return on investment.

  • fsboladysc

    Thanks for this super information. My question is how do you sell a note secured by real estate? Can you provide this information to me. How do you find someone who wants to buy this type of owner financing and is there usually a seasoning situation before you can sell and owner financed note? Thanks for your help.

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