Recently, a popular a topic of discussion is the real estate notes business, mostly due to my new investing program called “Note Flipper” that teaches how to flip notes. Most people are unfamiliar with the notes business and how to flip notes. In this article I’d like to discuss exactly what the notes business is and how you can flip notes.
Let’s start from the beginning…
What is a Real Estate Note?
When a home purchaser wants to buy a property but doesn’t have the cash, he seeks a loan from a lender. The lender could be a federally regulated bank, a private entity or individual or even the seller of the property (called seller financing).
Traditional banks are highly regulated and have specific criteria to lend money on a real estate purchase (credit, income, down payment, etc). However, private lenders can lend based on their own criteria (level of risk).
When making a loan there are 2 critical documents that are created.
Promissory Note: This document is a “promise to pay” from the borrower to the lender. It dictates all of the terms of the loan such as due date, interest rate, etc.
Mortgage/Deed of Trust: Depending on the state, the mortgage or deed of trust is what pledges the property as collateral for the loan. It has 1 primary purpose – securitize the loan with an asset. In other words, in the event of a default on the note, the lender can seize the property to repay the loan.
Having security is what makes private lending in real estate so attractive to investors. Unlike other investments (stock market), real estate loans are securitized making the investment safer. The notes industry refers to these private lenders as “note holders.”
Notes Industry is Booming…
Interestingly, the private notes industry is booming and is on 6 consecutive years of growth. Every year, more or more real estate loans are private (not banks) resulting in billions of dollars in loans all across the U.S.
Notes Are Really Cash Flowing Assets…
Now, once a private loan is created, it is now a cash flowing asset and I’m referring to the loan or what we call in the notes industry, the “paper” (not the property itself). This is a very important distinction. Let me re-iterate this…the loan has a principal balance that is to be paid back over a specified time from the borrower with interest, making it a cash flowing asset.
Why is that so important?
Because any cash flowing asset can be traded. In other words, there is a niche investment strategy to buy real estate paper. If the note meets the note buyer’s criteria, the note buyer will pay cash to buy the paper or note from the private note holder. Once purchased, that note buyer becomes the new note holder and begins collecting payments from the borrower.
A common question, most ask is why would a note holder sell their loan? The answer is simple and really no different than why a motivated seller would sell a property…She wants the cash today instead of interest over time.
Notes Can Be Flipped…
And for us flippers, here’s the exciting part…
Whenever you have motivated sellers (note holders who will sell their notes for cash and motivated buyers, (note buyers who will pay cash for notes), there is an opportunity to bridge those 2 parties as a flipper and get paid for doing so.
In other words, you can get paid a referral fee for finding a motivated note holder and matching him up with a note buyer and flipping notes is such a great opportunity because most people don’t know anything about it so there’s little competition.
Unlike traditional real estate where everyone is fighting over deals, there is an unlimited supply of note deals that you can flip! The key is knowing where to find these note holders and having a strong network of note buyers to flip them to.
After years of doing note deals, I’ve developed a system using software that finds note buyers for you and a platform where you can flip those deals to my nationwide note buyers network.