Note Basics and Note Brokering

A note is a written promise to pay money over time, and a note broker is the person who takes that promise to buyers and comes back with offers. This guide covers both, from the day a note is signed to the day it is sold.

People tend to arrive at the note business sideways. One sold a house and carried the financing. Another inherited a monthly payment from a parent, and a third read that brokering notes is a business you can start from a kitchen table. The same few ideas sit under all of those situations, so this page sets them out in order and links to the longer pages where each is worked through.

What a note is

A promissory note is a signed document in which one person promises to pay another a stated sum, at a stated interest rate, on a stated schedule. The person paying is the payer, also called the borrower or payor. The person receiving the payments is the note holder, also called the payee or lender.

By itself a note is only a promise, and much of a private note’s value comes from the security behind it. When the note is tied to real estate, a second document is recorded in the county records: a mortgage or a deed of trust, depending on the state. That document creates a lien, a legal claim on the property, and the lien is what lets the holder enforce the debt against the property under that state’s rules if the payer stops paying.

A real estate note is therefore two things that travel together, the promise to pay and the lien that backs it. A business note has no house behind it. Its security may be equipment, inventory or a personal promise from whoever bought the business, all of which are harder for a buyer to rely on.

How a private note is created

Banks create notes every day. A private note is one created without a bank, and the source this site deals with most is seller financing, also called owner financing: the owner of a property sells it and lets the buyer pay over time, so the buyer never takes out a bank loan.

The buyer makes a down payment, signs a note for the rest, and the lien is recorded. From that day the seller holds a note and receives a monthly payment. Why a seller would agree to that, and how the deal is put together, is the subject of seller financing basics.

Private notes also come from the sale of a business, from loans between individuals, and from land sold on a land contract, where the seller keeps legal title until the buyer finishes paying.

Who is who in a note deal

Role	What they do	How they are paid
Payer	Makes the monthly payment and owns the property	Not paid. Their terms do not change when the note is sold
Note holder	Owns the note and receives the payments	Interest over time, or a lump sum if they sell
Note buyer	Pays cash for the note and takes over the payments	The return built into the price they pay
Note investor	Puts money into notes to hold them for income	The payments, less what the note cost
Note broker	Takes a holder’s note to buyers and manages the sale	A fee or a spread, taken at closing
Servicer	Collects payments and keeps the payment record	A fee for the service
Title or escrow company	Checks the lien, records the transfer, handles the money at closing	Fees for the work

The words buyer and investor overlap, and a company that calls itself a buyer may in fact be a broker passing your note to someone else. It is worth knowing which you have in front of you before you decide whose number to trust.

Why a note sells for less than its balance

A holder has to grasp this idea before any offer makes sense, and a broker has to be able to explain it in a minute.

What a buyer pays for is the future payments, and money that arrives later is worth less than money in hand today. So the buyer first decides what return they need on their cash, which is called the yield, and then works out the price at which the payments deliver it. If that yield is higher than the interest rate on the note, the price has to come out below the balance, and the gap between the two is the discount.

Monthly payment	$1,140
Payments left	168 (14 years)
Interest rate on the note	6%
Balance still owed	About $129,400
Buyer’s target yield	8%
Price for the whole note	$115,000
Discount	$14,400 (11.1% of balance)

Illustrative example. One note, used across this site so the figures agree. A real price depends on the payer’s record, the equity in the property, the lien position and the paperwork.

Every figure in that table is arithmetic, and none of it is a penalty. A buyer who wanted a 6% return would pay the full balance, and a buyer who wants more than the note pays has to pay less to get it. How much more they want depends on how safe the note looks. A payer with a long on-time record, a property worth well over the debt and clean documents all pull the required yield down and the price up.

The holder also has choices short of selling everything. On the same illustrative note, selling only the next 60 payments raises $56,200 today, and the note comes back afterwards with 108 payments left. That is a partial purchase. It needs a steady payer and enough payments left to divide, so it is an option on some notes and not on others.

What a note broker does

A broker stands between a note holder who wants cash and the buyers who have it. The work runs in this order.

Understand the note. Collect the terms, the documents and the payment record, and spot the problems before a buyer does.
Present it. Put the facts into a form buyers can price quickly and accurately.
Shop it. Take it to more than one buyer, because buyers want different things and price the same note differently.
Carry it to closing. Explain the offers, keep the file moving through the buyer’s checks, and stay with the holder until the money arrives.

A broker earns their place in the second and third steps. A holder who calls one buyer hears one number, while a broker who knows which buyers want which notes can lay several numbers next to each other. The longer version is on what a note broker does.

Setting the price, lending money and giving legal or tax advice all fall outside the job. And a broker working honestly will sometimes tell a holder that keeping the note is the better choice.

How brokers are paid, and why you should ask

A broker is paid out of the deal, in one of two main ways. In the first, the buyer pays the broker a fee when the sale closes. In the second, the broker agrees a price with the holder and a higher price with the buyer and keeps the difference, which is called the spread.

Either way the money comes from the same place: the gap between what the buyer is willing to pay and what the holder receives. So “what do you earn on this?” is a fair question to put to anybody quoting on a note, and a broker who cannot answer it plainly is asking you to trust a number you cannot check. Which of the two arrangements applies changes how much you are shown, so it helps to know how note brokers are paid before you compare quotes.

Our own practice is to attach a pricing worksheet to every offer we bring, showing the balance, the yield, the discount and what we earn. If you hold a note and want to see one, send us the details. Asking is free and commits you to nothing. We take the note to more than one buyer and price a partial as well where the payer’s record and the remaining term allow it.

The market notes are sold into

The signing of a note is the primary market. Every sale of that note afterwards happens in the secondary market, which for private notes has no exchange and no posted prices. It is a loose set of buyers: individuals buying with savings or retirement accounts, small funds, and companies that buy notes to hold or to resell.

With no posted price, two buyers can look at the same note and come back with different offers. Each has their own cost of money, their own appetite for certain property types and states, and their own view of the risk. The secondary market for private notes describes who these buyers are and how a note moves between them.

Brokers exist because of this. Where nobody publishes a price, the way to learn what a note is worth is to ask more than one buyer. If you are one of those buyers, join the buyer list and tell us what you look for.

If you are thinking about brokering notes

Note brokering is a real business with a low cost of entry, and that combination attracts loose talk. The plain version starts with money: a broker arranges a sale between a holder and a buyer, and the buyer’s money funds it, so you do not need to buy the notes yourself.

You do need to know the product. Holders ask hard questions about the discount, the documents and what happens to their payer, and one who gets no clear answer goes elsewhere. Finding those holders is the hard part of the work. Buyers advertise for notes, whereas a person who holds a note and wants to sell it this year does not announce the fact. Expect unpaid conversations too, because a holder who sees the numbers may fairly decide to keep the note.

The rules depend on where you are. Some states regulate people who arrange or buy certain kinds of loans, so read what to check in your state and speak to an attorney before you take on a deal. We make no claims about what a broker can earn. That depends on the notes you find, and nobody can promise you those.

Terms you will meet early

Unpaid principal balance. What the payer still owes, not counting future interest.
Yield. The return a buyer earns on the price they pay.
Discount. The gap between the balance and the price.
Seasoning. How long the payer has been paying, and how reliably.
Lien position. Where the note stands in line if the property is sold to pay debts. A first lien is paid first.
Loan-to-value. The balance owed as a share of what the property is worth.
Investment-to-value. The buyer’s price as a share of what the property is worth.
Performing and non-performing. Whether the payer is paying as agreed or has stopped.
Partial. A sale of some of the payments, with the rest returning to the holder.

These nine are a start. For any other word a quote or a document puts in front of you, look in the note glossary.

What this section does not do

These pages explain how notes and note brokering work in general, and they stop short of legal, tax or investment advice. The rules on seller financing, licensing, foreclosure and the sale of interests in pooled notes differ by state and by the facts of each deal. A page that touches one of those subjects tells you which kind of professional to ask.

Pick your next page

If you hold a note, find the note itself and whatever record you have of the payments received, because every price a buyer gives starts from those two things. Then reread the section on why a note sells for less than its balance with your own figures beside it.

If you buy notes, the page on the secondary market is the one closest to your side of the table.

If you are here to learn the business, start with what a broker does, go on to how brokers are paid, and read the licensing page for your state before you speak to a holder. The glossary is there for any term that stops you on the way.