Real Estate Notes: What are they, and what are the Benefits?

In simple terms, real estate notes are documents secured by real estate that obligate an individual or a company to make payments to another individual or company. Notes are created when a piece of real estate is sold. The person who promises to pay is the maker of the note, and the person who receives payment is the payee or holder of the note. Notes can either be payable on demand or at a specific time.

Real estate notes often benefit both the maker and the holder of the note. Even though there are many forms of financing available for purchasing real estate, there are still many situations where owner financing is the preferable way to go. Some situations include: a seller wanting to defer taxes on gains, a buyer and seller that both want to avoid paying the high bank closing costs and fees, weak buyer credit, sales between family members, or divorce agreements. In each of these situations, using owner financing and creating a note means creating more flexible terms and payment schedules. This allows buyers to improve their credit ratings, while sellers reap the benefits of receiving regular payments that provide a source of income.

The payments that a holder will receive from these notes are an asset, and like any other asset, they can be sold for a lump sum of cash. This benefits the holder because it gives them the option of earning their money over time as the payments on the note come in, or turning around and selling the note to another investor and receiving their cash right away.

Utilizing owner financing benefits both parties involved, and if the holder of the note chooses to sell it, this can create a great investment opportunity for someone looking to earn excellent rates on their investments because notes are often sold at less than their current outstanding balance. Buying and selling notes can be a very profitable business for those willing to invest in it.