First Note Investment Basics



This article presumes-at a minimum-you have a curiosity about possibly buying existing first Notes. An existing Note is a written obligation to pay money, the performance of which is secured by real estate. At the time the property was sold, the seller owned the property free-and-clear. The Seller created the loan (Note), thus the name “seller carry-back” Note. No Bank was involved with the purchase loan.

Two documents create a Note: (1) the Note itself and (2) a recorded instrument such as a Deed of Trust. The Note states the terms of performance such as amount owed, interest ate, periodic payment amount and the debt’s final due date. The security instrument describes the property forfeited to Beneficiary should the Payor stop paying.

Title Investments, Inc., finds and sells “seller carry-back” first Notes.

Note Buyer’s Yield:

This is the exciting part about buying Notes! Yield is the Note Buyer’s “calculated” rate of return on the investment, not the Note’s Interest rate. Yield is hypothetical. It is only used to calculate the amount you, the Buyer of the Note, would pay.

Let’s say, hypothetically, you want a 9% return on a Note investment.
In order to get 9% on a Note that is written at 6% you would have to buy it for less than it’s current balance in order to “make up the difference”. This is the wonderful part of Note investments.
On the other hand, a Note written with a 9% interest rate would have a purchase price equal to the Note’s balance in order to achieve a hypothetical 9% return.

Well, why don’t we go for 10%, or even 14% yield? That would be nice, but there is a limit on the amount of discount Note Sellers will accept.

Sometimes the Note Seller has no choice: The yield needed is mostly based on the type of property secured, loan-to-value and Payor’s credit scores.

We get the Note Beneficiary to sell, then what?

We handle all of the paperwork, subject to your approval and approval of the Title Company. Of course, Escrow instructions require the Note Seller to surrender the original Note, Deed of Trust and Policy of Title Insurance.

Once you decide to buy a Note, the transaction is completed with a licensed Title or Escrow company in the State the Note was created. At close of escrow an Assignment of the Note and Deed of Trust is recorded in your name, a lender’s Policy of Title insurance is assigned to you and the Payor is notified to send future payments to your address!