The 5 Main Sources for Buying Mortgage Notes

Being a note investor is contingent on one extremely important factor -- having sources for buying mortgage notes. Having an established seller’s list and reliable sources for finding quality notes to invest in is crucial in building your note business.

If you’re looking to build a seller’s list or find quality places for buying mortgage notes, here are the 5 main sources for where discounted notes are sold.

What type of mortgage notes do you want to buy?

Before you begin building your seller’s list is important to take into consideration the type of seller you should focus on contacting for the type of mortgage notes you want to buy.

You can invest in:

• First lien mortgages
• Second lien mortgages
• Institutional loans
• Private loans (like a seller financed or owner financed loan)
• Commercial loans
• Residential loans
• Performing loans
• Non-performing loans

The type of mortgage loan you are focused on buying will determine the type of seller or source you focus on contacting. For example, if you only want to buy institutional commercial loans there is no point looking on an online exchange for residential mortgage loans. Focus on the best source for your area of focus.

It will also tell you how to interact with the seller. For example, talking to a director of the loss mitigation department of a bank to buy a pool of non-performing loans for $3 million dollars at one time is very different than talking to a mom and pop investor who has one note to sell you for $75,000. Keep in mind who you are as an investor, what you are trying to accomplish in your note business, and who the best source may be for buying mortgage notes based on those facts.

Lending institutions

Lending institutions like banks, non bank lenders, or credit unions are the most obvious source for buying mortgage notes. However, buying directly from a bank is actually much harder than most people think. Most lending institutions do not sell loans on a small scale, it’s simply not worth their time or effort. Instead, they package millions of dollars worth of loans together selling them in a pool, which is a large group of loans.

Most times those pools of loans are sold to institutional investors as a security at face value, however some lending institutions will sell loans, especially non-performing loans to private note buyers or private investment firms like a hedge fund.

If you are trying to go bank direct, try to focus on smaller regional banks in your target investment area, and use a platform like Distressed Pro to help you decipher the health of the lending institution to help you determine if they are likely to have loans to sell or are in the current position to need or want to sell those loans.

It’s also important to note that not all banks sell loans, and almost no bank is going to sell you that “one loan you know is in foreclosure down the street and owned by them”. Try to avoid targeting big banks like Wells Fargo, Chase, or Bank of America as an example. While they have a lot of loans, small sellers aren’t their target buyer.

If you do make a connection with a bank directly, make sure you personally have the funding to close the deal or have a network of qualified, experienced, and vetted buyers who would be able to follow through on the purchase.

Private equity firms or hedge funds

Another common source for buying institutional loans is through private equity firms or hedge funds. A hedge fund is a private firm that pools money from private investors offering a return in exchange. Because they pool money they have big buying power and are able to go bank direct, buying millions of dollars of non-performing or performing mortgage loans at any one given time.

Most hedge funds have specific buying parameters or preferences. Hedge funds keep the loans that fit their buying parameters, and may charge off (another word for writing the loan off their books as a loss), or sell the loan on the secondary market.

Private equity firms and hedge funds that are focused on buying mortgage notes are one of the most common methods for buying loans as a note investor.

Private sellers

If you aren’t focused solely on buying institutional loans, another quality source for buying mortgage notes is the private market. Directly contacting private sellers who may have originated a note when they sold their house or an investment property using owner financing, or a private mortgage that was created for investment purposes. The easiest method of contacting these private sellers is through a targeted marketing campaign like direct mail or online marketing. If you market properly, the private market can be a very lucrative opportunity to buy discounted mortgage notes.

Online marketplaces

There are dozens of online marketplaces that have discounted mortgage notes available for purchase where individual note holders can list their note for sale. The exchange or platform takes a small percentage of the sale, and can help market the note to a larger pool of buyers. This is by far the easiest starting place for new note investors, and can be a great way to see what type of discounted notes are available in your market and the yields sellers are accepting at this time.

Servicing companies

In the mortgage industry, a servicing company is the licensed debt collector that helps service the loan which includes keeping track of all payments, the unpaid balance with any arrears, late fees, or accrued interest, contacting the borrower, and collecting escrow. Many service companies will service loans for large institutions and hedge funds, who from time to time have the desire to sell notes. Not every servicing company will sell notes, but it’s a viable source that is worth exploring if you’re looking to buy discounted mortgage notes.

If you are serious about becoming a note investor or buying discounted mortgage notes, continue learning how to properly market to or contact the right selling source and continue to develop your business. Know how to effectively do due diligence on any note deals that are sent your way and understand how to analyze and calculate your offers for the notes in a timely manner. After all, there’s no point in building a seller’s list if you don’t have the knowledge or funds to help see the transaction through.