Here are some more factors to consider when considering buying mortgage notes for investment:
If you have a secured lien with your promissory note and mortgage, it makes the risk relatively moderate, especially with equity to protect the mortgage. They say, “It's better to have a bad loan with equity than a bad tenant.” With notes, you have benefits and security backed by real estate.
When it comes to management, notes are a better investment compared to a real property because notes tend to be more passive, making them easier to manage. With notes, you will not get calls about plumbing leaks; you avoid dealing with tenants, townships, and contractors. Also, location is not a big factor. It is easier to own notes in areas that you may not want to buy and hold real estate, especially short-term. Owning notes often has less liability and responsibility.
A note buyer can obviously manage more loan notes than properties. Loan counselors can handle as many as 15-25 loans per month. How about a real estate investor handling properties? 25 a month is unlikely.
Mortgage notes are often purchased at a discount, which means higher returns. With delinquent mortgages, the borrower will always think about the possibility of foreclosure, which will make them try to pay only on the principal. This can dramatically change the note’s profitability and reduces the risk exposure of the note holder at the same time.
Compared to tax lien or tax deed certificates, mortgage notes allow investors to collect interest on a monthly basis. There is good cash flow during the holding period. Tax lien and tax deed certificates are only paid when the lien or deed is redeemed. There is no cash flow or income at all while you are waiting.
How to Buy Notes
Here is the ideal process when investing in notes:
• Note Profiling
This is where you decide on what types of notes you’re interested in purchasing (risk profile, type of asset securing the debt, borrower’s profile, etc.).
• Look for Sellers
Brokers - You can find local mortgage brokers when you look online and express an interest in buying notes to see what’s available.
Banks - Not just banks buy notes from other banks, investors buy notes from them, too. And they buy them for a very huge discount. Banks want good performing notes, so they want to get rid of the non-performing ones. They do this by selling them for a low price, which investors can take advantage of.
Loan Sales Platform - Companies like Loan MLS, FCI Exchange, and Loan Market source and provide notes for you to buy on their platform.
• Note Analysis
When you get a prospective performing note, read the terms and conditions to find out important information from the selling source such as the principal owed on the note, the interest rate, and the term left on it. Then you can analyze note prospects by doing some risk underwriting, return underwriting, and checking the borrower’s financial status.
• Buying the Note
You may want to hire a lawyer to help with transferring ownership of the lien rights and benefits. This is when you become the new lender of the principal amount of the loan. You may then close the note by giving the lump sum to the original note holder.