Quite a bit of factoring is involved when note brokers buy and sell mortgage notes, especially if they are to maximize profits. Real estate notes investment is a serious numbers-crunching game, that when played wisely, can earn investors a large yield. A strong grasp of the time value of money is absolutely necessary, and so is the ability to assess a payer's willingness to change the terms of his loan.

The first step is to find lenders who are interested in selling their real estate notes. Often a note holder will find himself in a situation where he wants or needs a large sum of cash, perhaps to buy a second home, take a vacation, or pay for a child's college tuition. The note holder could just be tired of collecting payments against the loan, so he decides to sell it to note buyers for cash.

Factoring in All Considerations

When real estate note brokers purchase partially paid notes, they pay the note holder a discounted price after factoring in the time value of money, the payer history, and property condition. Since there is still a significant period of time left for the payer to make payments, the future payments are not worth the same amount in current dollars. Calculations are made to equate all the payments into current value, which is how the discount is determined.

After purchasing notes at a discounted price, note brokers try to restructure the loan and increase its value. Increasing the value of the loan requires the payer to refinance or increase payments, which requires a new contract. Factoring the same concept of time value of money, we can understand how increasing payments now creates more value. The note can then be sold for a higher price.