By understanding the details of buying, selling and investing in notes, says real estate specialist Robert Shemin, “You are able to have a real insider’s edge on making money in real estate.”
What are real estate notes?
Real estate notes (also called mortgage notes or promissory notes) are agreements that make signatories personally liable for the repayment of a full loan amount. Notes always include specified terms, like the amount and duration of the loan, the applicable interest rate, etc.
So how are they used in practice? Well, if you hold a piece of property that you sold, but carried back a portion of the property value that you are currently receiving monthly payments on, you enjoy the profit of interest from your buyer. You also carry the burden of collecting if the buyer defaults. This risk can be offset with security against the property.
In such situations, an investor may contact you to offer a cash-out or one-time payment, which will give you a lump sum of cash in exchange for your remaining ownership of the property. The cash offering will be somewhat less than the value of your holding on the property, but will free you of the risk of foreclosure or loan default.
In other words, they will offer to buy a note for your equity in the property.
Note buyers look for properties with decent equity and reasonable chances of property value increase. Note sellers look for deals that offer them a good value for their equity relative to their concerns about the property’s risks. On both sides, there is potential for making a profit.
Why do people buy and sell notes?
Some note-buyers and sellers make impressive incomes, and others use it as a side business on their primary income from real estate investing.
“Just like real estate properties, you can get notes at really great deals right now,” Shemin says. “Some people do it for a great return. Some people buy notes to get the real estate that’s secured by the note.”
What about creating notes?
Another creative way to sell a house in today’s market is to create and sell a note. Many people, including experienced investors, find that the most challenging part of real estate is getting financing.
“If I’m having trouble getting financing for a property, I could call a note buyer and say, for example, ‘Bill and Jill, whose credit is OK but not perfect, have $10,000 to put down and will write a note for $190,000,’” Shemin says. “The note buyer will help me structure the term of the note and the interest rate. I could perhaps get a sale and get financing where usually I would not be able to do so.”
One suggestion Shemin offers is to work with Insider’s Cash.
“Insider’s Cash owns and creates notes that you can buy. Their notes can be really good investments because there are no tenants and no repairs and they’re secured by real estate. Insider’s Cash also has money to help you buy investment properties. It’s good to be on the inside with Insider’s Cash.”