What is a Real Estate Note?
A real estate note or mortgage note is similar to a promissory note which is a written promise or obligation to pay a specific amount, with interest, within a specific time frame. The mortgage, also known as the security instrument, pledges the property as collateral to ensure the performance on the obligation. This allows the note holder to sell the property and re-coop his investment in the event the payer does not pay as agreed.
Mortgages can be sold over and over many times. In fact, it is very common. Those of you that have ever owned a home, you may have experienced this when you are notified that your loan is being serviced by another lending institution. Your mortgage note was just sold, at a discount, to another bank. Typically the terms don’t change for the homeowner, but the return is now greater for the new servicer because they bought the note for a discount.
Investors Buying Notes From Banks
Not only do banks buy notes from other banks, investors buy notes from banks… for HUGE discounts. Especially right now because banks are overwhelmed with non-performing or toxic loans. And because they want good performing loans, they dump the bad notes for cheap to make room for the good. Similar to a garage sale when you keep the things you want and get rid of the things you don’t want for really cheap. It’s not uncommon to settle notes for just pennies on the dollar of the original amount. This is considered a note settlement.
Why would a bank discount a note so much? Most banks don’t like to force the sale of a home through foreclosure. There is time and costs involved in doing so. So in many cases if you catch the bank at the right time, they will sell the note in order to receive cash now. Banks don’t own money, they own paper. Sometimes it’s good paper and sometimes it’s bad paper. The bad paper they want to get rid of.
It’s also a matter of the time value of money, which is the present value over the future value. A dollar today isn’t worth as much as it was 10 years ago. It will be worth less, 10 years from now. If you have a 20 or 30 year mortgage, the value of that payment will be a lot less than it is today. Banks understand this very well which is why they are willing to sell notes for huge discounts to investors.
Investors look at note buying as a huge opportunity because they can pick up a secured investment (real estate) for pennies on the dollar. They will receive a very nice return for a long period of time. They also play the odds that most homeowners will sell or refinance within 5 years so they get an early payoff. Not only this, but the homeowner can usually stay in their home which creates a win, win, win for everyone.
Buying Notes vs. Short Sale
There are huge advantages of buying the note vs. doing a short sale even though they are very similar in process. One of the biggest advantages is that the homeowner can stay in their home. Those that have 2nd mortgages are perfect candidates. After the mortgages are discounted, it makes the payments manageable not to mention create equity in a home that previously was upside down or under water. Now the homeowner has the option of selling and making a profit.
Short sales take a very long time. This is an equity sale so the process is very quick and it does not harm the homeowners credit like a short sale would. In fact, the homeowner doesn’t even need to be delinquent. We’ve settled 2nd mortgages that were not delinquent. We also negotiate release of lien and liability to protect the homeowner from deficiency issues that a short sale may not protect.
So if you’re working with someone who has a 2nd mortgage, delinquent or not and they’re struggling but want to stay in their home, a better option might be to buy the note or let us settle the note. Even if the homeowner doesn’t have the money to settle the note, we buy notes and either keep them or re-write them so other investors in our network get a nice return and the homeowner gets a lower payment.