If you did not already read Parts 1 of this article, please find it in How to Invest in Real Estate Notes – Part 1 or request copies from the author.
Hopefully, Part 1 of this blog piqued your interest in real estate notes. If you know what you’re doing and don’t get overly aggressive, being a mortgage note buyer can be quite profitable and have less risk than many other investment alternatives. Here, I will go into the basics of finding a mortgage note broker and the beginning phase of buying a mortgage note.
As in most things, the fastest and safest way to get started is to get together with a trusted and experienced individual. Check out potential note broker partners thoroughly with the Better Business Bureau and do a Google search to ensure that you’re not dealing with a scumbag.
Once you’ve found a good broker, let them know that you would be interested in buying a small mortgage note or two to get your feet wet. You will need to tell him or her
the note parameters that interest you – geography, property type, minimum payer credit score, etc. – and the yield (rate of return on your investment) that you
require. Just as you have a choice of brokers to work with, keep in mind that the broker has a variety of investors that they can use. So, try to find a niche (i.e. property type or geography) that the broker doesn’t already have covered, and run with that.
Once you have established your parameters and partnered with a broker, be prepared for when that broker sends a real estate note opportunity your way. You’ll need to offer a competitive price to that broker, who will then offer the mortgage note holder a slightly lower amount, with the difference being the broker’s commission and coverage of his expenses. The broker will expect you to present a quote to him within 1-2 business days of receipt of his quote request. More importantly, assuming that the documents and property values are as they were originally presented, you MUST honor that quote. If you arbitrarily change quotes or back out of the deal without a valid reason,
the broker looks bad in the eyes of the client and won’t want to work with you again.
If the price presented by the broker is accepted and the client agrees to sell his note, then the due diligence process begins. A competent broker will get all of the information related to the real estate note and send it to you for review. This would include the payer’s credit report, a purchase agreement signed by the client, and copies of all documents from the original transaction. In Part 3, we’ll dig into the due diligence process in more detail.