Introduction to Notes

Buyers, brokers and investors in mortgages and other cash flows find them to be high-yielding investments. Notes, also called cash flows, income streams, debt instruments or paper, are thought by many to be limited to bank notes or discounted seller carryback mortgages. 

Today, however, the terms mean much more.  Not only are smart money managers investing in and brokering receivables and discounted paper like private seller carryback mortgages, trust deeds and contracts for deed, but almost any other debt that is paid over time, not necessarily secured by real estate, can be a marketable cashflow. 

This includes annuities, leases, insurance benefits paid in installments (called structured settlements), retirement accounts and royalties, even lottery winnings -- and much more. Even such esoteric financial instruments like tax lien certificates, contractor's liens, medical receivables and commercial accounts receivable ( factoring ) can provide you, or smart institutional group investors, with multiple streams of income.

In other words, today the term cash-flows can mean any marketable I.O.U. that represents a promise to pay over time.

Notes provide cash flows. They are usually secured by something of value that can be foreclosed on or otherwise claimed by the note owner if the payments are not made. They are normally sold at a discount from their balance. For example, a $10,000 note may be sold for $8,850.00.

Why are notes discounted?

Because of the time value of money: dollars in the future are worth less than dollars today. Suppose you are offered your choice of a $10 bill and a $100 bill. You can have the $10 right now, but if you choose the $100 you'll have to wait a month to get it. Almost everyone will choose to wait for the $100. Suppose you can have the $10 now, but have to wait a year for the $100? Or 5 years? Or 10 years? At some point you'll say, "I'll take the $10 now." You've just discounted a $100 bill to under $10!

In the same way, a note is discounted because the money is paid over time. A financial calculator is used to determine the value of a note, based on the investor's desired yield.

How can you make money with discounted notes and cash flows?

Innumerable ways. You can buy them for investment at yields above bank CDs and money market funds. Or, you can buy them at one price and sell them for a higher price. You can even contract to buy them, sell them for a profit, and never have a cash outlay doing it!

How does a note seller and a note buyer get together?

The kinds of notes that are the easiest to find and work with are privately created when someone sells a property or business and "holds" or "takes back" some or all of the financing. For example, someone may own a house on which they have paid off their bank mortgage. They sell their house for $100,000, receive a $20,000 down payment from the buyer and take back the $80,000 balance in the form of a "seller-held mortage" In some parts of the country it's called a "seller carryback mortgage" or "owner financing" or similar terminology.  It all means the same thing:   The buyer makes payments over time to the property seller. In other words, the seller acts just like a bank.

One day the seller decides he needs more cash than the monthly payments are giving him. Since you've advertised that you buy such notes, he contacts you for a quote on his mortgage. Maybe it has a $60,000 balance. You calculate the value (we'll teach you how) and offer him, say, $51,266.23. He sells the note to you and now you collect the monthly payments. Your investment produces a nice double-digit yield on your money, and if the payor ever defaults, you get a $100,000 house (perhaps worth even more than that by then) for your $51,266 investment, plus a couple thousand for closing costs, less the payments you already received. 

Of course, you could also broker that mortgage by selling it to an investor at a higher price than you paid for it (and you use the investor's $51,000 to buy it in the first place!).  Most people get started in notes by brokering and hope to become an investor someday; some have.

This is only one of dozens of examples of how notes work. Real estate notes are only part of the story. Notes can be created with anything of value as the collateral (there are also unsecured notes, but we don't recommend them). However, real estate notes remain the backbone of the note brokerage business. 

Learn About The Note Business