How does buying a mortgage note work?

Asked by Roy Lhanie, encino, CA Wed Jan 11, 2012

How does buying a mortgage note work? What does it mean exactly? Can someone elaborate in simple terms? Thanks

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Michael Cheng’s answer
Michael Cheng, Agent, San Jose, CA
Thu Jan 12, 2012
In terms of looking for notes, there are plenty of note brokers around the country who can each give you access to a nationwide selection of note deals. You take over the note and either collect on the monthly or the balloon. There's not much to that part of the secret sauce. Of course, evaluating which is a good note to buy is a full-time effort and takes plenty of investment experience.
Web Reference:  http://www.archershomes.com
2 votes
Annette Law…, Agent, Palm Harbor, FL
Wed Jan 11, 2012
Mortgage notes, and any other instrument of debt, can be bought and sold, readily.
The purpose is primarily to increase one's investment yield.

As an investor, this becomes a forth level profit center.

As a consumer it is a good option for replacing those saving accounts with 1% interest payments, CD with 2% interest payments, and easily reach 8% without trying. This is PERFECT for self directed IRAs. You should be looking for seasoned 8%+ notes.

Here is how I do it.
Any home loan with private lending, generally in second position, is a note that can be purchased. An investor just selling a cash flow, multi-unit property, for example, will very likely be looking for a 24 month place to park their assets until they are ready to buy new real estate. They money is currently in a holding situation with a zero or 3% yield. This is your note buyer.

Locate a note holder, public record, receiving interest greater than 8% and strike a deal for them to sell the note. Position yourself as a DISCOUNT note buyer. A discount note buyer...that's really important. This is the note holder , owner or seller.

The 'buyer' will purchase the note at face value for the increase in interest they will receive.

That's really, really simple. That is also the beauty of the whole affair. Be aware, there are unlimited variations in the ways this can play out.

There's clearly much more to know, but, keeping it simple, that is it in a nutshell.
Web Reference:  http://www.MyDunedin.com
2 votes
Tina Lam, Agent, San Jose, CA
Sun Jan 15, 2012
@ John,

Kenny is right. You really need to know what to look for in a note. Hence, I avoid buying notes at auction as I'm not comfortable diving into that deep end just yet.

Then, it's the wild west of seasoned notes on the secondary market. There's no free lunch -- you're accepting a difficult to quantify risk of default to get up to 20-30% returns.

Instead, I prefer to generate my own pipeline of notes with my primary investors. Since I handle the real estate transactions, I personally get to know the quality of the underlying property and the borrower/buyer.
Web Reference:  http://www.archershomes.com
1 vote
John Arendsen, Agent, Leucadia, CA
Sat Jan 14, 2012
Thank you Kenny and CA for all the valuable info. I really appreciate it. I'll definitely do some studying.
1 vote
Centermac Re…, Agent, Fremont, CA
Sat Jan 14, 2012
While note buying can be lucrative, it can be risky as well.

You need to have pretty good working knowledge of ant-deficiency and trust deed laws. If you don't know about the full credit bid rule, you might want to read up about it. It is critical. I once represented a client who was an avid investor on notes and he lost a ton of money because he had no idea what a full credit bid rule was. Of course now he knows all about it but that knowledge came with a big price tag.
1 vote
Rudi Hofmann, Mortgage Broker Or Lender, El Segundo, CA
Sat Jan 14, 2012
Roy- I was a loan officer for one of the oldest and largest SoCal Trust Deed Invest men Brokerages. Should you wish to discuss your concerns- I am available.

First- When I worked there we required new investors to read the DRE Booklet. (link below)

Investors were required to sign a document they read this in it's entirety prior to opening an account: http://www.dre.ca.gov/pdf_docs/re35.pdf

Happy "TD" Investing- Rudi
Web Reference:  http://www.umboc.com
1 vote
Michael Cheng, Agent, San Jose, CA
Fri Jan 13, 2012
@ John,

If you can find notes yourself, then there's no need to use any note brokers. I only made that suggestion in case you don't have a ready pipeline of note deals. It really is quite interesting, since the underlying paper often pays better than holding title.
Web Reference:  http://www.archershomes.com
1 vote
Annette Law…, Agent, Palm Harbor, FL
Thu Jan 12, 2012
John,
As Robert indicated, your primary note holder will be the individual who offered owner financing. On the public records website of your county this most likely will appear as Private Financing. Start your search there.

There are much easier ways, but not suitable for a public forum. (English translation: Trade secrets are not to be freely divulged)
Web Reference:  http://www.MyDunedin.com
1 vote
John Arendsen, Agent, Leucadia, CA
Wed Jan 11, 2012
Oh, and thank you Roy for sharing your question for my education.
1 vote
Robert Chome…, , San Diego, CA
Wed Jan 11, 2012
John,

Generally the notes that are purchased by small time individuals are private notes such as those made by sellers who carry back the financing. If they want to cash out, they sell their note and someone buys it from them for either face value of the note, or often at a discount which produces a much higher yield. Imagine buying a $100,000 note paying 6% for $70,000. Then eventually collecting the full $100k when that owner sells or refinances (plus the 6% a year the whole time). Nice investment.
1 vote
Robert Chome…, , San Diego, CA
Wed Jan 11, 2012
Buying a mortgage note means you take ownership of a mortgage and you receive the interest income from the mortgage and of course you have to deal with it if the borrower stops paying.
1 vote
rocheleau.mi…, Both Buyer And Seller,
Wed Jul 9, 2014
Visit http://www.thenotefactory.com

Check out the videos, they are very helpful.

There is a great description of what seems like a very complex concept but in reality it is very simple.
0 votes
John Arendsen, Agent, Leucadia, CA
Mon Dec 16, 2013
I'm amazed to see this 2 year old question continue receiving answers.
0 votes
Macaba Ray, Home Buyer, Washington, PA
Mon Dec 16, 2013
* A mortgage note is a type of promissory note showing the terms of an owner-financed sale of a property.
* The terms include the interest rate, duration of payments, payment amount, due date of first payment, etc.
* A mortgage note is sometimes called a real estate note, a deed of trust note, or simply a promissory note — they are basically the same for most purposes.
* The note is the “I.O.U.” while the deed of trust or mortgage makes the property the collateral for the sale.
Web Reference:  http://seascapecapital.com/
0 votes
Alfred Grich…, Both Buyer And Seller, California City, CA
Fri Aug 23, 2013
Great info, sounds great. So many times we are looking for big money to start business, but what we fail to know that buying non performing mortgage notes can result in great business.
So for example i buy a note for 10k and the property is valued in 60k, if the borrower doesn´t pay the monthly payment for 3 months then i go to foreclosure process and if a sell the house i get in return 50k or more. Or i can receive monthly payments including and additional interest rate the borrower has to pay me. I just found this site that i wanted to share with you all
http://fciexchange.com/ amazing rates and properties so far.
0 votes
Charles Blum…, , Wayne, NJ
Sat Apr 20, 2013
when you buy a mortgage note, you are having the previous mortgage holders position assigned to you via a mortgage assignent, and generallly would then be entitled to all the benefits and reliefs the previous lender was.
0 votes
Charles Blum…, , Wayne, NJ
Mon Apr 15, 2013
Generally, you will get basic information regarding a paticular loan or loans from a seller. Based on the infomration supplied, you would provide your seller with an 'indicative bid', which is a non-binding bid made in good faith that essentially tells your seller that, based on the information they supplied, you will be willing to pay 'x' for the loan, provided that information bears out in your due diligence period. Due diligence will take 5-15 days, and you should prepare to and be willing and able to close within 5-15 days thereafter.
0 votes
Abby S, , San Francisco, CA
Fri Nov 16, 2012
The simple answer is that the note owner (aka note seller) will assign the right to receive future payments on an existing mortgage note to a note buyer/investor. The note seller will request an offer on the note for sale and once received and agreed upon, the parties will begin the process.

The process is as follows:

1) Receive a Quote

2) Accept the Offer

3) Sign the Note-Sale Documents (provided by the broker/note buyer) & Submit all Docs on said Asset

4) The buyer will then underwrite the deal (appraisal/BPO, title search, borrower interview, etc)

5) Deal will be approved, and funded (assuming it survives the underwriting process)

6) Deal is funded and the note seller gets their lump sum of cash and the buyer gets the payments on the note.

If you have any additional questions on the process or want to discuss how to create the most valuable mortgage note for resale to an investor, I suggest contacting our company to do so, as we are a direct and independent note buyer on the secondary mortgage market (http://www.AmerinoteXchange.com).
0 votes
John Arendsen, Agent, Leucadia, CA
Sun Jan 15, 2012
Hi Tina, incase you couldn't figure it out I meant seconds not ends. Sorry.
0 votes
John Arendsen, Agent, Leucadia, CA
Sun Jan 15, 2012
Tina, I hear ya on the end's. Wouldn't touch them with a 10 foot pole. I also agree on the pipeline as a valued lead source. Frankly I'm just dipping my toe into this pond presently. My niche has been buying manufactured home repo's, renovating and then either renting or doing a lease option which is a lot less complicated than real estate.
0 votes
John Arendsen, Agent, Leucadia, CA
Fri Jan 13, 2012
Michael, I really do appreciate you knowledge and information. I've been seeing advertising promoting notes for sale but never followed up on them because I wasn't interested at the time. But I'm sure many of those ads are being promoted by brokers as well as private parties. How would you recommend that a broker enter this arena?
0 votes
John Arendsen, Agent, Leucadia, CA
Thu Jan 12, 2012
I think I'm getting it. The more I'm hearing the more interesting it sounds.
0 votes
Daniel Klein, Agent, Beverly Hills, CA
Thu Jan 12, 2012
When you buy a mortgage (note) you agree to buy the rest of the future payments for a discount today. For example, if a lender has a $300,000 mortgage that is paying $1800/month for 28 more years, depending on the notes rate/vs current market conditions, means that an investor who wants to buy this note, may be willing to pay a percentage of the face today.
There are a lot of note brokers who have buyers who may be willing to purchase a note. Most notes that are sold piece by piece are seconds, or owner carries, much like those that are created with AITD's.
All Inclusive Trust Deeds are simple to set up, and are a unique strategy to purchase property while keeping the current mortgage in place. It is an eloquent solution to getting around the due on sale clause.
0 votes
John Arendsen, Agent, Leucadia, CA
Thu Jan 12, 2012
OK Katherine you've got my attention. Please enlighten me about AITD's.
0 votes
Katherine Jo…, Agent, Rancho Cucamonga, CA
Thu Jan 12, 2012
Why buy mortgage notes when you can do AITD's
0 votes
John Arendsen, Agent, Leucadia, CA
Thu Jan 12, 2012
Michael, Just curious. As a RE broker why would I want to go through another broker? Couldn't I do all the necessary due diligence myself instead of paying someone a commission to find a note that I'm perfectly capable of finding myself?
0 votes
John Arendsen, Agent, Leucadia, CA
Thu Jan 12, 2012
I get it. Thanks Annette............
0 votes
John Arendsen, Agent, Leucadia, CA
Wed Jan 11, 2012
Thank you Robert and Annette. Where does one look to purchase notes?
0 votes
John Arendsen, Agent, Leucadia, CA
Wed Jan 11, 2012
Robert, what does it take to take over a note? Just curious. I've never journeyed down that road but I've been hearing a lot about it lately.
0 votes
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