Make your first note one that is simple to understand: a first lien, a payer with a proven record, a property you can value, and a complete set of documents. Size it so that a bad outcome is one you could absorb.
The first purchase teaches you the process. It does not need to be your best deal, and it should not be your most complicated one.
Decide what the note is for
Before you open a single file, write down how much you can commit. That means money you will not need for the life of the note, with a reserve on top. Write down what you want from it as well: monthly income over many years, or a shorter commitment that returns your money sooner. Then be honest about the work you will accept, which could be as little as reading a statement each month or as much as handling a payer in trouble.
These answers narrow the field quickly. A buyer who wants a shorter commitment and a smaller check should look at partials, where you buy a set number of payments and the note then returns to the seller. A buyer who wants long income looks at whole notes with many years left. Both are priced side by side in the guide for note investors.
A sensible profile for a first note
| Feature | Why it helps a first-time buyer |
|---|---|
| First lien | Nothing but property taxes generally stands ahead of you, so the outcomes are simpler to reason about. |
| Performing, with a provable history | You are pricing a payment stream, which is arithmetic. A defaulted note asks you to price a legal process. |
| Owner-occupied house | People protect the home they live in. A house is also easier to value and to resell than land or a special-purpose building. |
| Real equity | The payer has something to lose, and you have a cushion if you are wrong about the value. |
| Complete documents | You learn what a clean file looks like before you have to judge a messy one. |
| A state you can research | You can find an attorney there and learn how default is handled before you need to know. |
A note like this costs more than a rough one. On a first purchase, the extra buys you a deal you can follow from end to end.
Know the full cost
The purchase price is the largest number on your budget, and there are others beside it:
- Closing costs: title work, recording fees, and an attorney or closing agent.
- A property valuation and any inspection you order.
- Servicing setup and the monthly servicing fee.
- A reserve for the day something goes wrong: unpaid property taxes you choose to cover, a lapsed insurance policy, legal fees.
We do not quote figures for these because they vary by state, by provider and by deal. Get real quotes before you bid and take them off the yield on the note, since every one of them comes out of your return. Added to the price, they are the real answer to how much money you need to buy a note.
Set up before you bid
Sellers and brokers favor buyers who can close, so have these in place first.
- Decide how you will take title: in your own name, in an LLC or in a retirement account. Each has legal and tax effects, so ask an attorney and a CPA. The name on the assignment has to be settled before closing documents are drafted.
- Choose a servicer, the company that will collect the payments for you, and open the account so the note can be boarded, meaning set up on the servicer’s system, as soon as you close.
- Find an attorney who handles note purchases, ideally one licensed in the property’s state.
- Know where the money is. It should be liquid and ready to wire on the closing date.
- Write your criteria: note type, lien position, states, balance range and minimum yield. A source can only send you matching notes if you have said what a match is. With us, you give them when you join the buyer list, and saying that this is your first purchase tells us to send simple first-lien files with full documentation.
Reading your first offering
A note is offered with a summary sheet. Check that it gives you these facts, and ask for any that are missing.
- The unpaid principal balance, which is what the payer still owes, and the date it was calculated.
- The interest rate, the payment, the number of payments left and whether there is a balloon, meaning a large final payment.
- The original sale price and the down payment.
- The property address and type, and whether the payer lives there.
- The lien position.
- The payment record and how it is documented.
- Who has been collecting: the holder or a servicer.
Then do the first piece of work yourself. Look the property up. Rebuild the balance from the original terms and see whether it matches. Price the payments at your yield. If the summary and your own sums disagree, ask why before you go further.
Bid, review, close
Your bid is a price that depends on the file checking out. Say what it depends on: a satisfactory title report, a valuation at or above a stated figure, verified payments. If you later lower your price, the reason should be something you found and can show. Cutting a bid shortly before closing with no new facts is a tactic sellers are warned about, and it will cost you future deals.
Use the review period fully. Work through the due diligence checklist item by item, and take the questions to ask before buying a note into the conversation with the seller.
At closing, confirm before funds are released that the original note is endorsed to your buying name, that the assignment is signed and ready to record, and that the payer notice is ready to send.
Mistakes to avoid on a first purchase
- Buying the yield. A high yield is a low price, and a low price has a reason. Find the reason.
- Trusting the stated value. The seller’s idea of the property’s worth is a starting point. Order your own opinion.
- Skipping title. Lien position is a fact in the county records, and a summary sheet can get it wrong.
- Putting everything into one note. One payer and one property is a concentrated bet.
- Having no reserve. The note that needs money is the one that has stopped paying you.
- Starting with a hard one. Second liens, vacant land and defaulted loans all have their place, and that place comes after you have closed something simpler.
Practice on paper before you spend
Take two or three summary sheets and run the whole exercise without bidding: rebuild the balance, look up the property, price the payments and write down what you would want verified. You will find out which parts you can do alone and where you need the attorney. A first bid made after three dry runs is slower than one made on instinct, and on a first purchase slow is the right way to err.
Related questions
Should my first note be in my own state?
It helps, because you can see the property and you may already know an attorney. It is not required. What matters is that you can research how default is handled in that state and can find local help before you need it.
Is a partial a reasonable first purchase?
It can be. A partial needs a smaller check and ends sooner than a whole note. The agreement is longer, though, because it has to cover early payoff, default and the return of the note to the seller, so have an attorney read it.
Do I need an LLC to buy a note?
Not necessarily. People buy notes in their own name, through an entity or through a retirement account. Each choice has legal and tax effects that depend on your situation and your state, so ask an attorney and a CPA before deciding.