For most people, including a large percentage of realtors, bankers, and real estate investors, note buying is a mystery. Those in the real estate industry may have occasionally heard of owner financing and real estate notes but had little reason to dig into them deeply. In simple terms, note buying is the job of note buyers who buy real estate notes, which can also be referred to as mortgage notes or deed of trust notes. One niche of note buying is the purchase of business notes but that will not be covered here.
The note buying process begins when the note holder – the person who sold a property and offered owner financing – contacts a mortgage note buyer about selling their note. The two parties would usually talk by phone so that the note buyer can learn the details about the financial transaction and the property itself. This takes 10-20 minutes, depending on the deal complexity and the thoroughness of the note buyer.
The next step in the note buying cycle is for the note holder and note buyer to agree on a price which the latter will pay for the note. The buyer will nearly always be paying less than the balance of the note, which is called a discount. Instead of buying the full note, the buyer of the note will sometimes offer to buy just some of the payments and leave the remaining back-end payments for the note holder to keep. Often, this “partial” is advantageous to both parties in that the note buyer reduces his overall risk and the note holder gets just the amount of money that is truly needed.
Once a price is agreed upon, the note buyer/investor will check the credit of the payer and request copies of documents like the note, closing statement, etc. from the note holder. The note investor would next review the documents, have a drive-by appraisal completed, and do a title search to check for additional liens on the property or other issues. This due diligence phase normally takes 2-3 weeks.
The final stage of the note buying process is that the note buyer sends documents to the note holder to take assignment of the real estate note. The latter would sign the documents and send them with the original note and deed of trust or mortgage to the investor. The investor would get the assignment recorded with the county and wire the agreed upon funds to the note holder. The note sale is now complete, and the payer is notified to being making payments directly to the buyer of the note.