Real Estate Notes

Investing in real estate notes can become a lucrative career for those with a strong understanding of the time value of money, and an eye for valuable properties. The cash flow note selling industry has such a reputation that a market emerged for people selling books and offering other tools to teach others how to buy and sell mortgage notes.

When Real Estate Notes Are Used

Anytime a person takes out a loan from a bank or commercial finance company, real estate notes, also known as promissory notes, are signed. These papers are legal documents that describe a payer's promise to pay a certain amount of principal plus interest over a period of time. Even with loan agreements that are made between friends or family, promissory notes are still recommended.

Before signing a real estate note, the parties must figure out a repayment plan. Banks and commercial lenders often require amortized payments made over a period of time, usually paid monthly. Each payment goes partially toward interest and partially toward principal. The amount going toward interest is highest in the first payment and lowest in the last because of the amount of unpaid principal.

Other repayment plans exist, but are less common than amortized payments. For example, the terms described in a note may require monthly payments for a short period of time and a final large balloon payment. Usually only seen with loans between friends, and rarely offered by banks or commercial lenders, are real estate notes signed for a single payment of interest and principal at a designated future date.

The Need to Sell Real Estate Notes

There are times when people with partially paid notes must sell these notes for cash. A note holder may suddenly find unexpected debts that must be paid, or perhaps his son is entering college and tuitions are due. People often sell their real estate notes to purchase other property, a car, or pay for a vacation. Whatever the reason for selling notes, there are real estate note brokers who buy them.

Note brokers are eager to purchase real estate notes because inflation and the time value of money affect the current value of notes. Since money collected in the future is worth less than money collected today, notes are purchased at a substantial discount. However, real estate notes can be restructured to be worth more money in today's dollars.

Profiting from Real Estate Notes Flipping

Once a mortgage note broker purchases a note at an attractive discounted price, his first goal is to get the note paid off by the payer, most likely by refinancing. Imagine a $10,000 note purchased at an excellent discount. If the payer agrees to refinance the loan, the broker makes a yield of $10,000 minus the discounted purchase price. The broker now also has a new promissory note agreement with the payer, which can be sold to another investor or kept to yield interest.

Sometimes, refinancing is not an option for the payer, but increasing monthly payments is a possibility. If a payer is in the position to pay more each month, then he can pay off the loan in a much shorter period of time. By increasing payments, the promissory note is also suddenly worth more money and can be sold to another investor for a greater profit.