Discounted Notes

Whenever someone gets a mortgage loan a "note" is created. A note is nothing more than a piece of paper that states how much you borrowed, at what percentage rate, how long of a term, and who is involved in the loan.

Although banks are the ones that commonly create notes, a seller can create a note as well. The seller is basically "loaning" their equity to the buyer who must pay down the principal plus interest. This sort of note is created when you buy or sell using seller financing.

Notes are not always wanted by the seller. Maybe he created the note to get out of a sticky situation but now he would rather have cash. If this was the case it is possible to liquidate the note by discounting it and selling it to a note buyer.

A note buyer is an investor who would rather pay the discounted rate for a note and collect the interest payments and any instant equity he gets from buying the note. For example. Let's say you were a seller who had a $40,000 note and you wanted cash. You would discount the note for $25,000 cash and the note buyer would still be owed the extra $15,000 from the property buyer. On top of the $15,000 profit the note buyer just received he is also getting whatever interest rate the seller and buyer worked out during the negotiation of the real estate transaction.

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