The Basics of Real Estate Notes

The cash flow industry is a booming business.  It refers to the purchase and sale of income streams, i.e. notes.

What is a note?

A note, simply put, is a promise to pay.  The note itself is a document that includes the face value of the note, interest rate, monthly payment, term of the note, and any other clauses agreed upon by the parties involved.

How is a real estate note created?  Here are a few examples:

1. Samantha Seller owns a home free and clear and Bill Buyer is interested but cannot qualify for conventional financing.  Samantha Seller then agrees to carry the financing.  Samantha Seller becomes the bank and Bill Buyer's monthly payments are sent to Samantha Seller based on the terms set in the note.

2. Sue Seller wants to sell her home and Brad Buyer can obtain conventional financing however he doesn't have the funds to cover the down payment.  Sue Seller can agree to carry a note for the balance of the down payment as a second mortgage.  The buyer, therefore, makes monthly payments to the bank (first mortgage) and Sue Seller (second mortgage).

3. Now let’s take a look at some numbers for all you number people out there!

Sam Seller has a beautiful home for sale and he’s asking $105,000.  Bob Buyer calls and offers $100,000 for the property with $10,000 cash down if Sam Seller will carry the loan. 

Sales Price of the House…$100,000

Down Payment…$10,000

Remaining Balance…$90,000

Term…20 years (240 months)

Interest Rate…10%

Monthly Payment…$868.52

Sam Seller accepts the terms and sells his house for $100,000.  He receives a nice down payment of $10,000; sets up a note for the remaining $90,000; and begins receiving payments of $868.52 every month. 

But let's say that Sam Seller wants to start a business and darn it all, his money is wrapped up in the house he seller-financed to Bob Buyer.  Here comes Nancy the Note Investor to the rescue! Nancy is interested in purchasing his mortgage; she asks him what he needs the money for, how much he needs, and how soon he needs it.  Sam Seller and Nancy the Note Investor come to an agreement and he gets to walk away with a lump sum of cash today instead of waiting the full term of the note for his money.  As for Nancy the Note Investor, she has purchased his note at a discount agreeable to Sam Seller in order to make an acceptable return on her money.  Everybody wins!

Some of you may be wondering why on earth Sam Seller, or anyone for that matter, would accept a discount on their note.  The answer is… drumroll please… the Time Value of Money! Which would you rather have:  the $50 in my left hand or the $100 in my right?  What if you had to wait ten years for the $100, but you could have the $50 now, which would you rather have?  The $50, of course!  Note holders feel the same way... they want their money now so that they can take advantage of other opportunities, pay off debt, purchase a second home, send their child to college etc. 

The cash flow industry is not limited to seller-financed mortgages, however; structured settlements, bankruptcy cash outs, viaticals, and even lottery winnings are viable cash flows that can be sold to investors and yes, there are people willing to buy them!

Laura Ceville is a real estate investor and Cash Flow Consultant from Beavercreek, Ohio.  For more information on how you can sell your cash flows call 937.427.4521 today.