How to Buy Notes: Learning From My Worst Real Estate Note Investment

Wondering how to buy notes?

How To Buy NotesGet some real life lessons learned from my worst real estate note investment!

The note was secured by a small single family house in Arizona. The owners of the property ran a commercial cleaning business in Las Vegas and were planning to use the property in Arizona as a second home/ vacation home.

They purchased the home for $85,000 with a $20,000 down payment and the seller carried back a $65,000 note with $1,000 per month payments at 0% and a final balloon payment due after 24 months.

It sounded like a nice note with 8 months of on-time payments, a significant down payment and a final balloon payment paying off in 16 months.

What could go wrong buying this note?

Pretty much everything with this note did.

We knew that receiving the on-time balloon payment would be a bonus and went into the transaction knowing that we most likely would need to modify the note and extend the terms. The note had a balance of around $57,000 and we purchased the note for around $43,000 which gave us some flexibility in the terms we would be able to offer.

What we didn’t anticipate was having to modify the note well before the balloon payment became due. Unfortunately we only received a handful of monthly payments and then the payments stopped.

I contacted the payors and they asked for some extra time. They claimed they had a large cleaning client who was supposed to pay them soon and they assured us they would then pay us. After two months of more conversations and no payment we modified the note to a lower monthly payment that they said they could manage.

These payments continued for a while, but then they again stopped. The sellers asked to modify the note again with a lower monthly payment and another one year extension. We agreed. When the payors defaulted on this second modification we decided to foreclose and move on.

After the time consuming foreclosure process, we put the property on the market in February of 2011. We sold the house eight months later for $37,0000 and have so far received two on-time payments. While financially this has been one of our worst investments, educationally this has been one of our best. Here are the main lessons that we learned.

Lessons Learned on How to Buy Notes

Here are the key learning points gained from buying real estate notes:

Balloon Payments Very Rarely Materialize

While we knew the balloon was unlikely to pay off, we hoped the owners might have some cash on hand to diffuse the balloon. The fact is successful balloon payments are usually the result of the ability of the payor to obtain credit from someone else.

Note Modifications

If you require a note modification, know that a foreclosure is probably soon to follow. Prepare accordingly.


While we knew we were playing with fire on this note, we now have fully learned our lesson. We will never, ever get involved with a note where the payors have a credit score that starts with a 5. This shows you that the payors have a refined habit of not keeping their promises (other notes we hold confirm this too).

Consider Terms

Be cautious of owners who previously were able to negotiate 0% financing. You will come across this occasionally and buyers who negotiate this may be more difficult to deal with if you step into a transaction with them. We found this to be the case in both modification agreements we attempted.

Partials Protect

We should have moved ahead with a partial with the note seller which would have kept our investment lower and also would have kept the note seller interested in how the payors performed.

Non-payment Action

When a note investment stops paying, act quickly. When you hear the payor’s story, listen, but continue to move toward getting a payment in quickly. By giving a payor more time, it rarely solves their problem and only makes it more difficult for the payor to get caught up. They are more likely to bring the account current when the amount outstanding is within reach for them.

We lost a ton of time and energy on this note but at the same time we are better note buyers and investors today because of it.

About the Author: Greg Gehlen is the Principal at Canyon Capital, which specializes in the purchase of real estate notes and deeds of trust. He can be contacted at 702.515.7416 or online at

You may also enjoy reading these additional articles on buying mortgage notes by Greg Gehlen:

How to Buy Real Estate Notes Without Going Broke

Transitioning from Note Broker to Note Investor

Real Estate Note Investing: “Wow, That Sounds Risky!”

Note Buyer Success Story


  1. Great tip regarding balloon payments never materializing.

  2. Buying Real Estate Notes says

    Studies, public information and surveys ultimately commingl the numbers tto esstablish
    averages or mediaqn statistics. Like in many professions
    and occupations there are honest and ethical people andd there are some who
    arent. And, of course, it always depends on the circumstances of the seller.

  3. We have to be careful and have good credit when dealing with notes. Otherwise, you are playing with fire.

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