The “paper” means the documents; the note, mortgage (or trust deed or contract for deed), property settlement statement, payment history, etc. If you are new to notes, or are not familiar with the laws of the state where the note was originat- ed, have a real estate attorney in that state review the documents. These are the questions you need to ask about the paper (assume it is a first lien):

• What is the amount of the payments?

• Are they due monthly or otherwise?

• What was the date of the first payment?

• When is the next payment due?

• How many payments have been made?

• How many remain?

• Is the note performing, non-performing or re-performing?

• Is the note fully amortized?

• If non-performing, what is the status of foreclo- sure, if any?

• When is the final payment due?

• Is there a balloon payment due? If so when is it due and what is the balloon amount?

• Is the note secured by a mortgage, trust deed or contract for deed?

Ask the seller for copies of the payment history. If the note is serviced, the servicing company will provide it. If the seller collects the payments, ask for copies of the deposit slips or bank statements.

• What was the original balance?

• What is the current balance?

The 3 P’s of Real Estate Note Investing

• What is the interest rate?



Get a current appraisal of the property paid for by the note seller; if necessary, offer to reimburse the seller for half the cost if you buy the note. If that doesn’t work, offer to pay the full amount, but only after you buy the note. Do not spend any money before you buy the note. Also, the best appraisal is a complete one, inside and out. Second-best is a drive-by appraisal. Third-best is a real estate broker’s opinion of value. Here are the questions you need to ask about the property:

• How much is rent?

byW.J. Mencarow

• How long has the tenant been there?


real estate note is simply an IOU secured by property.

year — almost 300 a day!1 That number could double if second liens are included. Few people know that real estate notes can be bought and sold. Fewer still know the secret that makes investing in notes so profitable: They are sold at a discount from the balance. That discount gives the in- vestor a higher yield than the interest rate of the note. For example, you find a note with a $50,000 balance at six percent interest and120 monthly payments of $555.10. If you bought it for $50,000, your yield would be six percent. Not bad. But, what if the note owner needs cash right now and will accept $40,000? Put that in a financial calculator and you find that your yield is 11.18 percent. Before you buy a note, you need to know how to ana- lyze what I call The 3 P’s of Note Investing: The Paper, the Property, and the Payor.

• What was the sale price of the property?

In a conventional real estate transaction, a buyer makes a down payment, obtains a loan, and signs a note promising to pay a certain amount each month to the lender until the loan, plus interest, is paid. In a private real estate transaction, a buyer makes a down payment, does not obtain a loan, but instead signs a note promising to pay a certain amount each month to the seller until the price of the real estate, plus interest, is paid. The seller becomes the bank. One is a loan, the other is an installment sale. If the buyer defaults on a private real estate note, the seller’s collateral is the property. They can either modify the terms of the note, pay the buyer to move, or foreclose. Over $17 billion in first lien private real estate notes are created annually. About 100,000 are created each

• What was the sale date?

• How much cash did the buyer put down?

• What kind of property is it (e.g., single-family house, duplex, etc.)?

> Continued on :: PG 96

• What is the address?

• Does the note payor occupy it? If not, is it cur- rently rented?

W.J. Mencarow is president of The Paper Source, Inc., an educational organization for note investors and brokers since 1987. He offers a free eight-part ecourse on notes at

46 | think realty housing news report :: august / september 2019

thinkrealty . com / hnr | 47

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