Where does your profit come from when you buy a note?

Question

Where does your profit come from when you buy a note? From what I understand, when you buy a note you are becoming the lender to the homeowner and then they must pay you their mortgage payments per month. Do you then pay the bank back with that money? If so, how do you make a profit off of these?

Thanks,

Mac Gallagher

Thanks,

Mac Gallagher

Wayne Snell · Answer

@Macintyre Gallagher sounds like you are new to note investing. I had a lot of people help me when I was first getting started, so I like to pay it forward. With that in mind, I recorded a video explaining what I did when I got started, as well as what you need to do to start out with notes (the systems/processes/decisions). If you would like to view it (for free - and there are no strings because I do NOT sell anything) message me privately so I can share the link with you (BP doesn't allow us to just post links)

Dion DePaoli · Answer

As a note investor you purchase the note and security instrument and the payments come to you. You would have cashed out the prior note holder in typical sales. So you don't have anyone to pay unless you borrowed capital to purchase the note yourself.

The profit from a loan comes from the interest payment and principal discount, if any. In a loan purchased at par (100% of balance due) you are simply collecting the interest on that loan as the principal is a return of your own capital.

If you purchase the loan at a discount that discount (<balance due) is on the principal amount due on the loan and a portion of that becomes interest income for you the investor.

In some scenarios you can earn above those two items by collect advances made on the note prior to your ownership. That is money a previous holder put out to pay for things like taxes, insurance and some other concepts. If you didn't capitalize those costs then when those are collected they flow into you interest income as well.

Jason Hirko · Answer

@Macintyre Gallagher When you buy a note, you are the bank. There's many different ways to make money when you buy a note. The most simple is like the people we sell our notes to sometimes - they buy it at par (or face value) and collect the remainining interest. On the other side of the spectrum, people buy non-performing notes at a big discount and then either try to get the owner current or then foreclose.

Varinder Kumar · Answer

No you are becoming the bank. You get your profits in number of ways known as exit strategies. You can either try to to a workout with the home owner in the form of loan modification to get them reperforming on their loan again if its non performing or you can foreclose on them and then sell the home and make a profit. You are investing in debt. When you purchase a note you are purchasing a percentage of the unpaid balance for example if the UPB (unpaid balance) is $70k then generally you pay about 45-60% of UPB so you would pay $35k if its 50% of UPB. Now since you purchase the note for $35k the AIV (as is value) would generally be higher than $35 or it should be but thats a part of your due diligence when you first analyze the note. Say the AIV is $50k well if you foreclose on them or if the property is vacant then you can just sell it for $50k and make a 15k profit minus any costs. The other profit comes from getting the owner reperforming by working out a loan mod to where they are paying less monthly to you for 30 years at what ever interest you decide. since you purchased it at half the amount you can afford to give them a lower monthly payment. This is just a small example of how notes profit works. Theres more to it.

-good luck

Patrick Desjardins · Answer

You have to realize that "when you buy a note" is very generic, and it is similar to someone asking how to make profit from purchasing a building. It depends on what it is you're purchasing.

If you're purchasing a performing note, then the profit comes from the interest portion of the payment that the borrower pays you each month. As you mentioned, you are the lender and your servicer (on your behalf) collects the money.

On the other hand if you're purchasing a non-performing note, where the borrower hasn't paid in months or years, there are multiple paths to profit but the two main ones are getting into a repayment agreement or foreclosing on the property and selling it/keeping it as rental.

I'm always open to questions and have nothing to sell so if you have other questions like these feel free to connect with me.

Where does your profit come from when you buy a note?

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