Buying and Selling Notes for Residual Income

Here’s one reason to love real estate notes… surprise payoffs! For years we have been talking about the benefits of keeping some payments as residual income when buying, selling, or brokering notes.

This is not just theory – it really works.

Need proof? Just last month we were fortunate enough to get one of those surprise payoff checks for $57,569.28!  And that was on a note we sold back in May of 2000.

Now before you start thinking this is some sort of easy overnight riches please understand that this does NOT happen on every deal.  In fact the average note broker fee is about 3-6% of the amount invested by the note buyer. (Check out How Much Money Will I Make in the Note Business for more on this topic.)

But when you combine the power of interest with time and the partial purchase there is an opportunity to earn residual income. How is this possible? Well here are the details from the initial note sale followed by the payoff update. Read more

Quoting Cash Flow Notes

When it comes to quoting and buying mortgage notes there are basically two camps of note brokers.

One camp takes the “Quote on the Fly” approach, while the other has the “No Note, No Quote” mentality. Read more

Top 5 Ways to Buy Mortgage Notes

One of the things that make buying and selling notes so appealing is the multitude of ways an investor can purchase a note.

Frankly, you are limited only by your imagination. Well, maybe imagination and reaching a desired yield.

Here is a quick look at calculating the cash flow business that even those with math phobias will like.

The Top 5 Ways to Buy Cash Flow Notes

1. FULL – A full is just that. Buying the entire note.

If the seller has 322 payments remaining, the investor purchases all 322. The full purchase is the most popular way to buy mortgage notes.

Even though it may not be the best choice for a seller, many sellers just want to be completely done with the note.

2. PARTIAL – Anytime an investor purchases something other than a Full it’s referred to as a “Partial.”

Typically when someone uses the term “Partial” we are talking about purchasing the next immediate “X” Number of Payments. This can be any number of payments.

The most common partial purchases are 60 months, 120 months, and 180 months.

If the investor purchases the next 60 payments, the promissory note reverts back to the seller on payment 61. The seller, at their discretion, may choose to sell more payments or keep the remaining payments.

3. PAYMENTS ONLY – This type of partial purchase involves a balloon mortgage note where the seller is due a large balloon payment at the end.

For example, the note holder is to receive 120 more monthly payments and then a balloon payment of $50,000.

“Payments only” would be when the investor purchases just the remaining 120 monthly payments but none of the balloon payment. The seller of the note would retain future possession of the balloon.

4. SPLIT BALLOON – Very much like the “payments only” option except in this case the investor purchases all of the monthly payments (120) and a portion of the balloon.

For example, the investor purchases all the remaining 120 payments and $30,000 of the balloon payment.

This would leave the seller the remaining $20,000 due of the balloon payment.

The seller and investor have effectively “split” the balloon ($30,000 to the investor, $20,000 to the note holder).

5. SPLIT PAYMENTS – In this type of partial, the investor purchases a portion of each monthly payment.

It is typically reserved for when the seller of the note is receiving a sizeable amount each month (although it really could be implanted at any time).

For example, let’s say the note holder is due 145 payments of $2,500.00 each month.

The investor may elect to purchase $1,750 of each month. This would leave the remaining $750.00 each month for the seller of the note.

Typically the payer mails the full $2,500 each month to the investor and then the note investor forwards the $750 to the seller. This avoids confusion among the payer of the note as well as helps the investor make sure the note is being paid in full each month.

The “amount” of each monthly payment that is purchased is completely up to the agreement of the investor and seller. It just needs to be worth the extra handling efforts.

MAKING THE CHOICE

As you can see, there’s more than one way to buy mortgage notes. Matter of fact, there may just be literally hundreds of ways to purchase notes since many of the methods can be used in combination with each other (including Reverse and Split Disbursement partials)

As long as the deal can fit into the best financial calculator, there is a mathematical way to purchase the note.

So which method is best?

The best method is dictated by the needs of the note seller and how best to meet that need while still protecting the yield and exposure requirements of the investor.

How to Calculate Interest Only Owner Finance Payments

Calculating the payment needed to cover just the interest on an owner-financed contract or promissory note is simple. Just follow three easy steps and avoid two common pitfalls.

Follow 3 Easy Steps

Step 1: Obtain the current principal balance and interest rate from the land contract or promissory note

Step 2: Times the balance by the interest rate

Step 3: Divide by 12

In fact it is so simple you don’t need the best financial calculator, any standard calculator will suffice.

Here are the steps in action:

Step 1: A seller-financed note has a balance of 100,000 at 8% interest

Step 2: $100,000 x 8% (or .08) = $8,000 (interest for the year)

Step 3: $8,000 divided by 12 = $666.67 (monthly interest only payment)

What It All Means

If the buyer pays just the interest every month then the balance stays the same and does not decrease.

If the buyer makes a payment that is more than the interest only portion then there is a principal reduction and the balance goes down.

Unfortunately there are two common mistakes people unknowingly make with interest only payments. Read more