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So You Think You Can Buy A Note

Written by Jeffrey R. Armstrong – President/Owner of Armstrong Capital

Your favorite Master Note Buyer – Straightforward, Honest, Fair…

Congratulations! You have decided that you want to buy a note.  The first step is to understand what we are talking about when we say “buy a note”.  We are NOT talking about funding a loan, creating a new loan, originating a loan, giving someone a loan or buying a loan that someone else is creating.  In the Seller Financed Note Industry when we talk about buying a note we are talking about buying an existing seller financed note at a discount – a first position Seller Financed Note secured by real estate that came about when the seller of the property carried back the financing to facilitate the sale of the property (also called a Purchase Money Mortgage).

Buying a seller financed note has its risks and its rewards. The risks could include the responsibilities and maintenance of holding a note such as worrying about:  collecting the payments, default and foreclosure, destruction and devaluation of the property, federal income tax reporting duties, bankruptcy / death / divorce of payor, abandonment of the property, deficiency judgments, IRS tax liens / other liens against payor, assumption of note by another payor, note holder may not be able to sell note if cash is needed and the note holder may spend the small payments frivolously.

The rewards might include a yield (return on investment) that can be much larger than other investments, an investment that is backed by real estate, no loss of initial investment (if the note is purchased properly) and long term extreme passive income.

Once you understand the advantages and disadvantages of holding a note you then need to determine for yourself your criteria will be to alleviate the risks.  Some of your personal criteria might include: What states, counties or cities are acceptable and what property types are acceptable (Single Family Home, owner-occupied, rental, Mobile Home with Land, SW, DW, TW, and Mobile Home without land, Other Residential 1-4 units, Commercial, Industrial, Improved Land, Raw Land or acreage).  You will also have to consider your pricing criteria such as Minimum Discount, Minimum Yield Requirement, Minimum Note Size, Maximum Note Size, Maximum ITV, Payor Credit Scores (minimum), whether you will purchase Partial Purchases or Full Purchases only, any Acceptable Unusual Circumstances (such as interest only, no payments, zero % interest, etc.) as well as any additional criteria that you make for yourself.  It is somewhat of an undertaking but well worth it to learn how to purchase a note properly (preferably, from someone that is a current practitioner and actually purchases notes) so that, if the worst case scenario were to happen (the payor defaults and you have to foreclose), you at least can get your money back.

Buying an existing seller financed note is simple but not as easy as it sounds. You are not able to just go to the internet, find a discounted seller financed note and buy it.  You are not able to just call someone on the phone and buy a note tomorrow.  There is an entire process and procedures in place to purchase notes and for some it is a full time business.   The seven step process of buying a seller financed note includes: 1) Locating Note Holders – Having 3-5 marketing methods working all the time. 2) Compile Information – Fill out worksheet, get the story behind the note, get the numbers, build rapport, find the need, get back to them in 24-48 hours with prices. 3) Verify Information – Pick up calculator; verify payment amount, balloon if any, current balance. 4) Determine Pricing – Use your yield, Minimum Discount, ITV and other tools to determine your pay price and options and Prepare to Positively Present options.  5) Negotiate Acceptance – Present the options. If NO then put on follow up list. If YES then set the hook! Get a copy of the Note, Settlement Statement and Payor’s credit to firm up the prices. Check credit – Renegotiate if prices need to change because of your criteria. Prepare Initial Purchase Agreement and list of what you need to continue. Gather all copies and information for due diligence package. 6) Due Diligence – Credit, Appraisal or BPO, Title, Property Taxes, Hazard Insurance, City-Data, Google, etc. 7) Closing and Funding – Prepare and send out closing documents, record assignment, and fund by sending checks or wire to seller. Send Goodbye letter to Hazard Insurance Company and Servicing Company if necessary.

Some note buyers start out as brokering notes to other experienced note investors first to gain knowledge, experience and cash flow before buying their own notes.  Once deciding to buy notes, you can see that there is quite a bit of work that goes on behind the scenes when a seller financed note is priced and purchased.  It is one of the most unknown and unique real estate investments in the nation.  If done properly, buying existing first position seller financed notes can also be one of the safest.

Remember, success demands action! TWITA! (That’s What I’m Talking About!)

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