BUSINESS FUNDAMENTALS
NOTES
MYTHS
FACTS
Buying a note is a lot less complicated than buying a house. You don’t need to deal with real estate agents, title companies, lawyers, appraisers, home inspectors, etc. It can be as simple as perform- ing the due diligence and having the seller sign the note over to you. And there are no closing costs! Note investors can make double- and triple-digit yields, but it is not usury. When a note is sold, the interest rate and the payments do not change. The investor’s yield comes from the discounted price paid for the note. For example, an investor finds a $10,000 note with an interest rate of 10 percent and payments of $132.15 per month. If the investor pays $10,000 for the note, his or her yield would be 10 percent, but if they pay $8,000, their yield is higher (15.63 percent). The note payor’s interest rate and payment amount never change. And there are no closing costs! You can buy seller-created real estate notes for a few thousand dollars. Or you can broker notes to institutional investment firms without using any of your own money and make enough to buy a note every so often. Many successful note investors started that way. No investment is risk-free, but unlike many investments, such as the stock market, when you buy a note, you have a great deal of control over your risk exposure. Suppose you pay $50,000 for a first lien note on a $500,000 house, and the payor defaults (unlikely, but it hap- pens). You will lose your $50,000, and you will spend, for example, another $50,000 on foreclosure and repairs. You sell the house for a quick-sale price of $450,000. After closing costs of $35,000 and the $100,000 you have in the deal, you net $315,000.
“YOU NEED A LOT OF MONEY.”
“THE PROCESS IS COMPLICATED AND HARD TO UNDERSTAND.”
“HIGH YIELDS ARE USURY.”
12 Myths of Real Estate Note Investing
“NOTES ARE VERY RISKY.”
Good notes are very liquid. There are many investment companies that buy notes all over the U.S. and can often close in a few days.
“NOTES ARE NOT LIQUID.”
DISPELLING FALSITIES IN THIS NOTEWORTHY NICHE OF REI.
It is hard to find motivated sellers with good notes. There are about 90,000 first-position private (seller-originated) residential and com- mercial real estate notes in the U.S.* My favorite method of finding them is networking with people who come into contact with note owners, such as attorneys, accountants, real estate agents, title company officials and bank trust officers. You can also get involved with local real estate groups and let people know you are a note investor. Also, consider notes secured by land, such as farms and lots, which are often sold with seller-created notes. Busi- nesses are usually sold this way as well. (Business notes may or may not be secured by real estate, but those secured by real estate are more valuable.)
byW.J. Mencarow
“NOTES ARE EASY TO FIND.”
W
hether you’re a new investor or have been in the game for a while, you might be uncertain of real estate note investing because of what you have heard. Here are facts to dispel just some of the many myths surrounding this niche of real estate investing.
*Original research by Scott Arpan, Advanced Seller Data Services, www.notesellerlist.com
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30 | think realty housing news report :: october / november 2019
thinkrealty . com | 31
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