Types of Notes Note Brokers Work With, and Which Are Harder

Most note brokers spend their days on private notes secured by real estate: owner-financed home and land sales, deeds of trust, land contracts, and mobile home notes. Business notes, second liens, commercial notes and non-performing notes come up too, but fewer buyers want them and they take more work to place. Treasury notes and mortgage-backed securities are not part of this market at all.

This post is for people learning the business. It sorts the common note types by how easy they are to place with a buyer, and why. Each type has its own guide under note types, so here the focus is on what each one means for you as the broker in the middle.

First, what “note” means in this business

A note, or promissory note, is a written promise to repay a debt on set terms. In private note brokering, the note is almost always one that a person or small business created when they sold something and let the buyer pay over time. The seller became the lender. That is why you will hear these called seller-financed or owner-financed notes.

Older articles on this topic sometimes lump in corporate bonds, Treasury notes and mortgage-backed securities. Those trade through securities dealers under a different set of rules. A private note broker does not handle them, and if someone offers to “broker” them for you outside a registered firm, that is a red flag.

The notes brokers see most

Real estate notes in first position

This is the core of the market. A homeowner sells a house, takes a down payment, and carries a note for the rest, secured by a mortgage or deed of trust recorded against the property. “First position” means this lien gets paid before any other if the property is sold or foreclosed. Buyers like these because the property backs the debt. Read more on real estate notes and on the first lien note.

For a broker, the work on these is mostly paperwork and payment history. A clean first-position note with a decent down payment and a year or more of on-time payments will usually draw several bids.

Land contracts and contracts for deed

Here the seller keeps legal title until the buyer finishes paying. Many buyers will purchase them, but state rules on forfeiture and title vary, and some buyers stay out of certain states. Expect more questions about how the contract was recorded. See land contracts.

Mobile home and vacant land notes

Both are common in owner financing, and both draw a narrower buyer list. A mobile home on rented land is personal property, closer to a car loan than a mortgage. Vacant land notes depend heavily on the down payment, since raw land can be slow to resell. See mobile home notes and vacant land notes.

The notes that take more work

These are not “bad” notes. They just have fewer buyers, so pricing is wider and the file has to be stronger.

• Business notes. Created when someone sells a business and carries part of the price. The security is often equipment, inventory or a personal guarantee rather than real estate, so buyers price in more risk. See business notes.
• Second lien notes. Paid only after the first lien. If the property loses value, the second lien can be wiped out. Buyers look hard at the combined debt against the property. See second lien notes.
• Commercial notes. Secured by income property. The tenant base and property condition matter as much as the payer.
• Non-performing notes. The payer has stopped paying. These sell, but to a specialist group of buyers who plan around workouts or foreclosure. See non-performing notes.
• Wraparound notes. The seller’s own mortgage stays in place underneath the new note. Buyers need to see that the underlying loan is current and understand any due-on-sale risk.

A side-by-side view

The table below is a general guide to buyer appetite, not a pricing chart. Individual notes vary a lot within each type.

A worked example: same balance, different notes

Here is a typical illustration. Say two sellers each hold a note with an $80,000 unpaid principal balance (the amount still owed), at 8% interest with 120 payments of about $971 left.

Seller A holds a first lien on a house, with 20% down and two years of on-time payments. A buyer looking for an 11% yield would pay about $70,460. Yield here is the annual return the buyer earns on the price they pay. The discount, meaning the gap between the balance and the price, is about $9,540.

Seller B holds a business note with the same terms, secured by equipment. A buyer may want closer to 14% or more for that risk, which pulls the price well below Seller A’s. Same balance, same payment, very different number.

The point for a broker: the note type tells you which buyers to call and roughly how they will think. It does not tell you the price. For how buyers actually build a number, see how note buyers calculate a price.

Markets that are not private notes

You will get calls about structured settlements, annuities, lottery payouts and lease payments. These are payment streams, but they work differently. Structured settlement and lottery transfers typically need court approval under state transfer laws, and specialist funding companies handle them. If you refer one of these, tell the caller to get several quotes and to read the transfer rules in their state. They are outside the private real estate and business notes this site focuses on.

What this means for you as a broker

• Learn first-lien real estate notes thoroughly before anything else. They are most of the deal flow.
• Build a buyer list that is sorted by note type. A buyer who loves land contracts may never touch a business note.
• Ask the type question early. It decides which documents you need and which buyers you approach. The guide on how to package a note for buyers covers the file.
• Be straight with sellers of harder note types. A wider discount is normal for them, and a partial purchase can sometimes close the gap.

Bottom line

Private note brokers mostly work with first-position real estate notes, plus land contracts, mobile home and land notes. Business notes, second liens and non-performing notes can be placed but need the right buyer and a strong file. Know the type before you promise anything, and send sellers to the specific note type guide so they understand what a buyer will look at.