Note Investing

Note investors manage their borrowers, and real estate owners manage tenants.   Both tasks can be outsourced.   Note investors may outsource the collection tasks to a note servicing company just as real estate owners can outsource rent collection and upkeep to a property management company.

Note Investing In Real Estate

Promissory note is the deed of agreement you have with your bank when you take out a home loan. By signing this contract, you promise to the bank that you will repay the loan according to the terms and conditions mentioned in the agreement. The bank will hold this document until you pay back the borrowed amount with interest in full.

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Now if the borrower defaults on the loan and does not pay the due debts, then the property can be sold to satisfy the debt. In such case, first mortgage has the primary claim on a property and will be paid first.

The first mortgage is the original loan taken out when the house is purchased.  The second mortgage may also be taken out at that time or at a later time as a home equity loan. First and second mortgages are both secured loans secured by your property. However, the second mortgage notes are much less expensive.

Note investors should make sure the borrower has appropriate insurance for the collateral and that the note investor is listed as the Mortgagee on the Evidence of Insurance certificate issued by the insurance company.  When listed as a Mortgagee on the insurance policy, the insurance company knows to issue a check to both the Mortgagee and the Borrower.   In addition, if the policy is changed or canceled, the Mortagee is notified and can take corrective action.

Note Investing Training

When making a decision on a note investment, the borrower’s credit and capacity to make regular payments, is equally as important as the value and quality of the collateral.     The process of evaluating the borrower’s credit and ability to pay is called “underwriting” the loan.   Banks underwrite borrowers to a set of rigid standards set forth by either the government, or their own board of directors.  Individual investors should set standards for their borrowers in accordance with their own appetite for risk.

Note Investing

The risk of foreclosure is directly related to the quality the note investment and the quality of the borrower.   Good quality borrowers are as important to note investors as good quality tenants are to real estate investors.

Note Investing Books

The old adage of real estate, “location, location, location” also applies to notes, although it may be more appropriate to say, “collateral, collateral, collateral.”    Value the underlying collateral of your note investment as if you will own the property (because you just might).    If possible, get an independent interior appraisal, visit or drive by the property.

To learn more about investing in mortgage notes, contact us  at Keyhole Academy. Got a question or comment? Please don’t hesitate to put down your thoughts in the comment box below. Also, it would be really great if you visit our Facebook page and like it as well.

Foreclosure When a note investor is not paid, foreclosure is the recourse.   The process of foreclosure varies by state and may be judicial or non-judicial depending upon how the state statutory scheme is set up.

What Is Private Mortgage Note Investing

If the property is older, or has any unique characteristics, you may also wish to have the collateral inspected, just as you would when purchasing real estate.     Inspections are easier to conduct when originating new notes than purchasing existing notes because the inspection can be made a condition of the note funding.  Once a note is funded, the occupant may not be as cooperative.

What Is Note Investing

In purchasing real estate, there is typically a purchase agreement and a Deed.   The purchase agreement details the terms of the purchase and the deed is recorded to put the public on notice of the new owner, and that the transaction closed.  In a note purchase, there is also a purchase and sale agreement which spells out the terms of the note purchase, but instead of a Deed, the instrument that is recorded is called an Assignment.   The previous note holder is assigning the beneficial interest of the note to the new note owner.

The mortgage note is signed to provide evidence and security for the loan, and it describes the terms and conditions under which the money has to be repaid. This legal document contains standard covenants between the lender and borrower. The lender will also hold this document until the loan is fully paid off. Once the loan is paid, the lender will record a release of mortgage or a re-conveyance of deed.

How Does Note Investing Work

To start investing in mortgage notes, you need to understand what mortgage notes are, how to find them and how to understand contracts. All these processes are easy to learn; anyone can do them, doesn’t require a whole lot of investment and are relatively risk free. Interested?

Note For Investing Companies

There is a whole market of mortgage notes out there, that you can simply tap into and start making profit without a significant amount of investment and without many hassles. You need to know a few tricks and tips of the mortgage notes, how to get a discount and low performing note, and how to manage those using simple rules and methods.

Note Investing For Dummies

A promissory note is written documentation of money loaned or owed from one party to another. The loan’s terms, repayment schedule, interest rate and payment information are included in the note. The borrower, or maker, signs the note and gives it to the lender, or payee, as proof of the repayment agreement. “Pay to the order of” is often used in promissory notes, designating to whom the loan is repaid. The lender may choose to have the payments go to himself or to a third party to whom money is owed. For example, Sarah borrows money from Paul in June and lends money to Scott with a promissory note in July. Sarah designates Scott’s payments go to Paul until Sarah’s loan from Paul is paid in full.

How To Make Money Note Investing

Notes are not nearly as easy to find as real estate investments.     Investors can look to buy notes directly on a note exchange such as LoanMLS.com, or you may choose to work with professional hard money lenders (a.k.a. private money lenders) specializing in note investments.      Education about investing in notes and investment opportunities may be found at the PrivateMoneyLendingGuide.com

What Is Real Estate Note Investing

Leverage is relatively easy to obtain on real estate and is one of the driving forces behind many investors’ desire to own the asset as an investment.   Leverage gives the owner the ability to enhance (or lever) the financial return.  For example, if an investor purchases a $300,000 single family home and borrowers $210,000, the amount of equity invested is $90,000.  If the property appreciates $20,000, the investor, would earn 23% on his equity ($20,000 / $90,000) from the appreciation[1].     If this same investor did not apply leverage against the real estate, the return would be $20,000/ $300,000 for a 7% return on equity.   In this example, the leverage applied to the real estate (e.g. the $200,000 loan) enabled the investor to achieve a 23% return vs. a 7% return.

Escrows are used to originate new notes but are less common when purchasing existing notes.   For a new note, escrow is often collecting borrower signatures, obtaining proof of insurance, and managing the closing of the original note.    For an existing note, there is less for escrow to do because the note has already been funded.     Instead of a traditional escrow, many purchasers of existing notes use a sub-escrow which is managed by the title company.  The title company obtains from the note seller, the endorsed promissory note and a notarized assignment.  The buyer sends the note purchase funds to title.    When the documents and funds are in hand at the title sub-escrow, the assignment is recorded, along with the selected title endorsement(s) and the funds are transferred to the note seller.

Note Investing Course

Leverage is more difficult to obtain for note investors.    Although it is possible to obtain a loan against a note investment, it is far less common and reserved only for the highest quality investors, and usually at above market rates.  Returns may also be enhanced by using a retirement account to hold your note investments.

* Folio Investments, Inc. (“Folio Investing”) is a registered broker-dealer and member of FINRA and SIPC and operates the Note Trading Platform. Folio Investing is based in McLean, VA and is not affiliated with Lending Club. Folio Investing has no role in the original issuance of the Notes and is not responsible for and does not approve, endorse, review, recommend or guarantee the Notes or the accuracy, reliability, or completeness of any data or information about the Notes. More information about Folio Investing is available at www.folioinvesting.com.

Note

A convertible note is typically used by an angel investor funding a business without a clear company valuation. An early-stage investor may choose to avoid placing a value on the company to affect the terms under which later investors buy into the business. A convertible note is structured as a loan. The balance automatically converts to equity under terms governed by terms set when a later investor buys equity in the company. For example, an angel investor invests $100,000 in a company using a convertible note. An equity investor invests $1 million for 10% of the company’s shares. The angel investor’s note converts to one-tenth of the equity investor’s claim. The angel investor may receive additional shares to compensate for the extra risk of being an earlier investor.

Note Investor

The first difference is the most obvious.  The real estate is not owned by the note holder:  the note holder has a lien position against the real estate.  If the borrower breaches the terms of the loan agreement, the lien holder can foreclose upon their interest and acquire title to the property.

Note Investing Strategy

Once a lender originates a loan, it rarely stays in their possession.  The mortgage note is sold into the secondary market, usually as part of a larger pool of notes.  From there, depending on the performance of the note, it’s usually held by the Buyer of the pool of notes, who either services the notes themselves or subcontracts them out to a Servicer.  A Servicer is a company that’s licensed by the various states to collect on behalf of the Buyer.

Note Investing Mentor

An unsecured note is corporate debt without attached collateral, typically lasting three to 10 years. The interest rate, face value, maturity and other terms vary. For example, say Company A plans to buy Company B for $20 million. Since Company A has $2 million in cash, it issues $18 million in unsecured notes. Because no collateral is attached to the notes, if the acquisition does not work out and Company A stops making payments, investors may have little compensation if Company A is liquidated. Since an unsecured note is simply backed by a promise to pay, it has a higher interest rate and is riskier than a secured note or a debenture, which is backed by an insurance policy in case the borrower defaults on the loan.

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