Brokering Notes vs Holding Them: Two Different Paths

In the note business there are two broad ways to make money: earn fees by arranging deals, or put your own capital into notes and hold them for their payments. Call them path A and path B. Path A pays for your time, and the income stops when you stop working. Path B builds an asset that pays whether or not you are working, but it requires capital and puts that capital at risk.

Neither path is better for everyone. Here is how they differ, with numbers, so you can decide which fits you, or how to combine them.

Path A: earning fees

A note broker connects a note holder who wants to sell with a buyer who wants to invest, and is paid for arranging the deal. The fee is usually built into the price, as a spread between what the buyer pays and what the seller receives, or paid as a set amount. Our guide to how note brokers are paid explains the common structures.

What path A offers:

• Little or no capital needed. You are not buying the note yourself.
• No exposure to the borrower. If the payer stops paying a year later, that is the buyer’s problem, not yours.
• Skills that compound. Every deal teaches you more about pricing, paperwork and buyers.

What it does not offer: income that continues without work. Each fee is earned once. When you stop finding and closing deals, the income stops. Brokering can also come with licensing requirements depending on your state and what you do, which our guide on licensing and note brokering covers.

Path B: holding notes

A note investor buys a note, or part of one, and collects the payments. The return comes from the interest the borrower pays and from any discount the investor bought at. Our guide to how note investing works covers the mechanics.

What path B offers:

• Ongoing payments. A performing note pays monthly, usually for years.
• Less day-to-day work once a deal is closed, especially if a servicer collects the payments for you.
• An asset you can sell. Notes trade in a secondary market, so you can turn one back into cash, at a price.

What it costs: capital, and risk. A borrower can stop paying. A property can lose value. Foreclosure can take a long time and cost real money. Notes are less passive than they are often sold as; see is note investing passive for an honest look.

The two paths side by side

Here is a simple illustration. The figures are round and only meant to show the shape of each path, not what anyone will earn.

The total payments on path B look large next to the fee on path A. But they arrive over two decades, depend on one borrower, and required a large amount of capital that could have been put somewhere else. That is the honest comparison.

Why people combine them

Many people in this business start on path A because it needs no capital and teaches the trade. Some then put part of what they earn into notes of their own, which gradually moves them toward path B. Others stay brokers for good because they prefer not to carry borrower risk. Both are reasonable choices.

A few practical points if you do combine them:

• Keep the roles clear. If you are brokering a note and also considering buying it yourself, tell the seller. Conflicts of interest damage trust quickly.
• Do not concentrate. One large note is one borrower. Several smaller notes, or partials, spread the risk.
• Price your own deals the way you would price a client’s. It is easy to be optimistic about a note you want to own.

A common mistake on each path

On path A, the common mistake is treating volume as the goal. A broker who pushes a seller toward a quick sale at a poor price may earn a fee, but loses the seller’s trust and often the referrals that would have followed. The better habit is to show the seller the math, bring more than one offer and accept that sometimes the right advice is to keep the note.

On path B, the common mistake is judging a note by its interest rate alone. A high rate on a note with little equity and a short payment history is not a high return. It is a high chance of having to foreclose. Investors who last on this path tend to buy fewer notes, check them harder and keep cash aside for the one that goes wrong.

Which path fits you?

Path A tends to suit people who like finding deals, talking to note holders and solving paperwork problems, and who have more time than capital. Path B tends to suit people who have capital they can leave invested for years, can tolerate the possibility of a default and want income that does not depend on closing the next deal.

If you are unsure how the roles differ in practice, our guide to note brokers, note buyers and note investors lays it out.

Bottom line

Earning fees and owning assets are different things. Fees pay for your work and stop when the work stops. Notes you hold can keep paying, but only with capital at risk and careful selection. Know which one you are doing on each deal, be honest with yourself about the risk on path B, and read about the risks of note investing before you move capital into it.