INVESTING IN REAL ESTATE NOTES – PART 1

Finding a safe place to invest that also provides you with a good return on investment has been a challenge since the origin of markets. Today’s troubled times have only made that search exponentially more difficult. Much of the media tries to put a happy face on current economic news, but the facts show that we still have problems on multiple fronts. From high employment and dropping housing prices, to unsustainable debts at the federal and state levels, to several foreign wars and emboldened Asian powers, the U.S. has a deeper set of economic issues than at any time in our recent history.

On the investment side, fixed income instruments are paying low rates, and the interest paid on bank savings accounts and money markets are laughably small. The stock market has performed relatively well over the past two years, but there are many of us who think it to be irrationally high. You would have done well if you bought gold, silver, and other commodities a few years ago, though these are very volatile markets that are not for the faint of heart.

But what about real estate? The housing market has been absolutely crushed over the past four years, and commercial properties are also struggling. Some very smart and well known investors are saying that now is a great time to buy either a primary residence or a secondary home. Personally, I don’t agree with them, as the underlying demographics and economy picture are scary. Of course, each investor needs to best judge the opportunity for themselves, as there are admittedly some good deals to be had in certain areas.

A lesser known investment opportunity is the buying of real estate notes. Many people, even most realtors and mortgage brokers, have either never heard of real estate notes or know almost nothing about them. That is because real estate notes, also known as mortgage notes and deed of trust notes, make up only a small slice of the overall real estate market. That said, a small piece of a huge pie can still be significant, which is certainly the case here.

A mortgage note is created when one individual or business sells a specified property to a buyer. The two parties agree to the sales price, down payment, terms, etc. and then create a note to show how the buyer will make payments to the seller. The seller is considered to be “carrying the note” and may either sell the note to a mortgage note buyer or keep it.

Becoming a mortgage note buyer and persuading note holders to sell you their note is not something that you should quickly jump in to. After all, even the safest mortgage note carries some risks, and the smart mortgage buyer is constantly thinking about the possible problems and worst-case scenarios. The most obvious risk is that a property buyer defaults on the note and the mortgage buyer is forced to foreclose. However, other elements like the condition of the property, having legally valid documents, the payer’s credit, etc. can all influence the probability of a default and the chances of the mortgage buyer recovering their investment in that scenario.

The above description has acquainted you with the basics of the real estate note market. In the next part, we will dig into more of the intricacies of mortgage buyers and what to do when someone is willing to sell their real estate note.


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