There are many options for investors to consider, when trying to diversify holdings. One trend that’s been gaining popularity is the buying of real estate notes. Before jumping in, however, it’s important to understand a little more about what this type of investment entails.
The 411 on Note Buying
There are many companies that make a business of buying notes, such as Amerinote Exchange, but that doesn’t mean individual investors can’t do it, as well. First, it’s important to understand that a note in these financial terms regards the promissory note that defines the terms of a loan and establishes the money to be repaid. The note, in real estate, transactions is just the promise to pay, but is also supported by the mortgage or the deed for the property.
When an investor buys the note, he also obtains the security instrument, meaning he holds the dead or other collateral. Essentially, the investor then becomes the lender, instead of the original financial institution. The investor often buys the note at a discount, making it a positive investment.
An Example of a Simple Note Buying Transaction
To understand this process a little better, it’s a good idea to broker a few of these transactions for other investors first. This helps you to observe first-hand how underwriting and closing processes are managed in the purchase of real estate notes. It may also help to look at a simple example of how buying a note benefits the investor.
On a transaction for a home selling at $120,000, the buyer would pay a down payment of $20,000, resulting in a $100,000 loan. In a note for this loan, there might be a 10% interest, creating terms for repayment that involve 360 payments at $877.57 each.
You can get the best deal on buying the note by waiting for the buyer to build up some equity, so suppose you buy the note after five years. At the time you buy the note, the balance left to be repaid is $96,574.32, but you will pay the lender $83,322.39. This allows for the possibility of earning 12% on your investment.
Conversely, if the borrower fails to make the payments, you can exercise the same rights as the original lender. You can opt to reclaim the property as your own, which means you have whatever had been previously been repaid, plus the property valued at $120,000.
Another option investors pursue is to buy just a portion of the note. They may pay anywhere from $10,000 to $50,000 for a limited portion of the note’s repayment terms. For instance, you may buy the note for five years, collecting the payments within that time frame. At the end of the five years, the note reverts back to the original lender.
Of course, there is much more to learn about buying a real estate note and it’s important to understand how your local laws affect this type of investment. Once you learn about the process and fully understand the challenges that face note buyers, this type of investment can be a lucrative venture.