One of the best kept secrets in real estate investing is clearly the practice of note buying. While purchasing notes, otherwise known as home mortgages, may seem like a complained process, it really isn't once you take the time to understand how it works. And, the best part is that you can set yourself up to be a note broker and make money simply for brokering the sale of a note from one person to another without ever having to tap into your own savings and investments to do so.
What is a Note?
A note is simply a mortgage loan which is secured by a piece of property. A note can represent a first mortgage, a second mortgage, a land contract, or even a contract for sale.
Why are Notes Sold?
Have you ever borrowed money on a home, in the form of a mortgage? If so, then you have been the borrower on a note. Generally, if you borrow from a bank or lender you are soon informed that your mortgage note is now held by another lender. So, while your payments are the same, and the terms of the contract is the same, you now send your mortgage payments to another lender instead of the one you originally borrowed from. When this happens your lender has sold your note.
Suppose for a moment that you take out a mortgage with Bank A for $100,000. That bank processes your mortgage and you start making your payments on it. Soon you are told that Bank B now holds your note and you should start making your payments to them. What has happened is that Bank A loaned you $100,000 to be repaid over 30 years. Bank B stepped in and paid Bank A $80,000 to purchase your note today and have the rights to collect your payments. So, Bank A takes the $80,000 today and then Bank B in exchange collects your payments over the life of the rest of your loan. This gives Bank A another $80,000 to loan to other people right away rather than wait for your monthly payments to come in to them.
Private Mortgage Investor Notes
In addition to the big banks making mortgages and then selling them to other lenders, often people who carry back mortgages on their paid for properties will sell their notes as well. In this instance they make you as a buyer a note for a portion of the purchase price and then choose to sell the note all at once rather than hold on to it and collect payments over time.
Brokering Notes
In addition to the banks buying and selling notes, you as a note broker can do the same thing. However, you can also simply broker the transaction between the lender and the buyer. If you know about a note which is for $100,000 to be repaid over the next 25 years at 6% interest, you can purchase that note many times for say $80,000 all at one time. You then sell that note to an investor for $85,000. This nets you as the broker a payday of $5,000 and you never used any of your own money in the process!
