Buying Notes: A Guide for Note Investors

Buying a note means paying a lump sum today for the right to collect a borrower’s payments. The price you pay sets your return, and the risk you take on sits with the payer, the equity in the property, the lien position and the paperwork.

This guide is written for the buying side of the table. It covers what a note buyer owns, where private notes come from, how the return is made, what to check before funding and what can go wrong. None of it is investment advice, and none of it says what you will earn. The aim is that you can look at a deal and judge it for yourself.

What you are buying

A note is a written promise to repay a loan, stating the amount, the interest rate, the payment and the date the last payment is due. When the loan is tied to real estate, a second document travels with it: a mortgage or a deed of trust. That second document is the security instrument, and it gives the note holder a lien, meaning a legal claim on the property that can be enforced if the payer stops paying.

When you buy a note you step into the lender’s position. Nothing changes for the payer except where the payment is sent: the rate, the payment and the payoff date stay as written. You receive the payments, you hold the lien, and you carry the risk that the payments stop.

The notes on this site are private notes, created when an owner sells a home, land or a business and agrees to be paid over time in place of a single check at closing. That arrangement is called seller financing, and following one such note from the day it is signed to the day it is paid off is the quickest way to see how note investing works.

Where private notes come from

A person who holds a note has an asset that pays monthly and cannot be spent in one go. Some holders reach a point where they want the cash: to retire, to settle an estate, to buy something else, or because they are tired of collecting. That is when the note is offered to an investor.

It can reach you by more than one road. You can find the holder yourself, in which case you see the deal before anyone else and do all of the checking. You can buy through a broker, who finds the holder, gathers the file and brings it to buyers, which is what we do. Or you can buy from another investor or a fund, one note at a time or as a pool that comes with a loan tape, a spreadsheet listing each loan and its key facts.

The roads differ in price, effort and information. A note that arrives with a complete file and a verified payment history costs more than one that arrives with a photocopy and a story, and the difference is what the missing proof is worth to a buyer.

How the return is made

Note buyers think in yield: the annual return your money earns if every payment arrives as scheduled. You choose the yield the risk calls for, then work out the price that produces it. Whenever the yield you need is higher than the rate written in the note, that price comes out below the balance owed, and the gap is the discount.

Here is one note seen from the buyer’s chair.

	Buy the whole note	Buy the next 60 payments
Price paid today	$115,000	$56,200
Payments you collect	168 of $1,140	60 of $1,140
Total collected if all are paid	$191,520	$68,400
Yield if all are paid on time	8%	8%

Illustrative example. The note pays $1,140 a month at 6% interest, with 168 payments left and about $129,400 owed. The 8% is what the arithmetic produces if every payment arrives on schedule, and it does not forecast what any buyer will earn.

The note charges the payer 6%. The buyer earns 8% because they paid $115,000 for a balance of about $129,400. Pay less and the yield rises, while a missed payment pulls it down.

The yield you ask for should move with the risk. A payer with a long clean record and plenty of equity in the property supports a lower yield and a higher price, and a thin file or a weak payer calls for the opposite. Choosing that number, and then testing the result against the property’s value, is most of the work in pricing a note as a buyer.

Performing and non-performing notes

A performing note is one where the payer is paying as agreed. A non-performing note is one where the payer has stopped. They share a name and very little else.

	Performing	Non-performing
What you are really buying	A stream of payments	A claim on a property and a problem to resolve
Priced mainly on	The yield on the payments	The property value and the cost of resolving the default
Work after closing	Low, if a servicer collects	High: contact, workout, possibly foreclosure
What you need to know	How to read a file and price a payment stream	All of that, plus default law in the property’s state

Non-performing notes sell at deeper discounts because the outcome is uncertain and resolving a default takes money and time. The discount is the buyer’s pay for both, and the skills involved differ enough that performing and non-performing notes are best treated as two separate lines of work.

What decides a note’s quality

The payer

The best evidence about a payer is their record on this loan. Seasoning is the number of payments already made. A long run of on-time payments, shown in bank records or a servicer’s ledger, tells you more than a credit score does, though buyers look at both.

The equity

Equity is what the owner would have left if the property were sold and every debt against it paid. It is the reason a payer keeps paying when money is tight, and it is your cushion if they do not. Buyers measure it two ways. Loan to value (LTV) is the balance divided by the property value. Investment to value (ITV) is the price you pay divided by the property value, and it is the one that describes your own exposure.

The lien position

Lien position is your place in line if the property is sold to pay its debts. The holder of a first lien is paid in full before a second lien holder receives anything, and a second lien can be wiped out if the first forecloses. Property taxes generally come ahead of both, which is why unpaid taxes matter to every note holder.

The paperwork

You are buying a set of documents. If the note cannot be found, the mortgage was never recorded, or the chain of ownership has a gap, your right to enforce the loan is in doubt, and no discount repairs that.

Due diligence before you fund

Due diligence is the checking you do between agreeing a price and wiring the money. Your purchase agreement should give you a review period for it. The work covers:

The collateral file. The original note, the recorded mortgage or deed of trust, and every assignment and endorsement that moved the loan from one owner to the next.
The payment history. Proof of what was paid and when, from a source the seller did not type up themselves.
The property. A current opinion of value, photos, and whether anyone lives there.
Title. A search confirming your lien position and showing other liens, judgments and unpaid taxes.
The seller. That the person selling is the person who owns the note and has the right to sell it.

When something does not match what you were told, you can ask for it to be fixed, change your price or walk away, and each of those is a normal result of a review. The due diligence checklist for note buyers lists each item to tick off.

Whole notes and partials

You do not have to buy every payment. In a partial, you buy a set number of payments, such as the next 60, and the note returns to the seller once you have received them. In the table above, the partial costs $56,200 against $115,000 for the whole note.

For a buyer, a partial means a smaller check and a shorter commitment. Your money is also a smaller share of the property’s value, so the cushion behind you is thicker. The trade is that the deal now rests on a longer agreement, one that has to say what happens if the payer pays off early, what happens if they default, and how the note goes back to the seller at the end.

A partial needs enough remaining payments to divide and a payment record strong enough that a buyer will take a share of the note, so some of the notes we send carry a partial option and some do not. If you are buying partials as an investor, the clauses on early payoff and default deserve more of your attention than the price.

Servicing after you buy

Someone has to collect the payment each month, record it, send the payer a year-end statement and follow up when a payment is late. That work is called servicing, and you can do it yourself or pay a servicing company to do it.

A third-party servicer costs money and takes the payer relationship off your desk. It also produces an independent payment record, which the next buyer will ask for if you ever sell. Rules on collecting consumer loan payments vary by state and by loan type, so ask an attorney what applies before you decide to collect payments yourself. Note servicing for investors sets the two routes side by side.

What can go wrong

Nothing insures a note’s payments, and there is no exchange where you can sell tomorrow at a quoted price. The main risks are these:

Default. The payer stops. Your return now depends on a workout or on the property.
Collateral. The property is worth less than you believed, or is damaged, vacant or hard to sell.
Title and lien. Something sits ahead of you that you did not know about.
Paper. A missing or defective document delays or blocks enforcement.
Liquidity. If you need your money back early, you sell the note at whatever discount the next buyer requires.
Legal. Foreclosure, collection and lending rules differ from state to state and can add time and cost.

Checking before you buy shrinks every item on that list and removes none of them. The risks of note investing takes them one at a time and shows which check addresses which risk.

Buying in an entity or a retirement account

Some investors buy in their own name, some through an LLC, and some through a self-directed IRA, which is a retirement account whose custodian allows assets such as private notes. Each choice changes how the note is titled, who signs, and how the income is treated for tax. Those are questions for an attorney, a CPA and, for a retirement account, the custodian. Settle them before you bid, because changing the buyer’s name in the middle of a closing causes delay.

How we work with buyers

Note holders come to us for a price. We gather the file, verify what we can, and send the note to buyers whose stated criteria it fits. Some notes we buy ourselves, and the rest go to our buyer list.

Those criteria are whatever you tell us when you join the buyer list: note types, lien position, states, balance range and the yield you work to. There is no cost to be on it and no obligation to bid.

You should know how that feels from your side. Where a note fits more than one buyer, you will be bidding against the others, and the seller sees the offers side by side. The seller also sees a worksheet showing the balance, the yield, the discount and what we earn. A bid that relies on the seller not understanding the numbers will do badly here. A buyer who prices fairly and closes on what they bid gets a prepared file and a seller who already understands the deal.

We cannot tell you how many notes you will see or how often, since that depends on what holders bring us and on what you are looking for.

A reading order

If you are new, read the pages linked above in the order they appear: how a note works, pricing, the two kinds of note, due diligence, partials, servicing and risk. Then price a few notes on paper before you price one with money. If you already buy notes, the two sections to reread are the ones on partials and on how we work with buyers, because the partial agreement and the seller’s worksheet are where a deal through us differs most from one you source yourself.