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How to buy and sell mortgage notes from banks?

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    June 29, 2023
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How to buy and sell mortgage notes from banks? | Debexpert

Note: The information provided in this article is for informational purposes only and should not be considered as financial or investment advice. It is recommended to consult with a licensed professional before making any investment decisions.


In the world of real estate and financial investment, the buying and selling of mortgage notes have become an attractive option for those seeking to diversify their portfolio and secure solid returns. These mortgage notes, often sold by banks, provide investors with a steady stream of passive income in the form of monthly payments from borrowers. However, understanding how to buy mortgage notes and navigate this investment opportunity can be complex.

A mortgage note is a promissory note that lays out the terms of the loan, the interest rate, and the obligations of the borrower. For many private investors, mortgage note investing is a way to generate monthly income without the responsibilities associated with rental property. The note buyer steps into the shoes of the bank, receiving the borrower's payments.

Mortgage notes can be classified into performing mortgage notes and non-performing notes. A performing note means the borrower pays on time, providing a predictable monthly income. On the other hand, non-performing notes refer to situations where the borrower has defaulted, which can offer a chance to buy notes at a significant discount and possibly turn them into performing notes.

When you begin the note buying process, start by connecting with mortgage note brokers or banks to find mortgage notes for sale. There are different types of notes, such as residential mortgage notes, commercial mortgage notes, and real estate mortgage notes. Each has its pros and cons. Additionally, platforms offering notes direct to note investors can be an excellent resource.

Once you've identified potential notes for sale, the next step is due diligence. What is the value of a mortgage note? Understanding involves assessing the borrower's creditworthiness, the property's condition, and the terms of the mortgage agreement. You might also want to consider the interest rate, whether it's a fixed interest rate, and if there's a balloon payment involved.

Buying mortgage bank notes often involves negotiation. The price of a mortgage note can frequently be negotiated down, based on the risk profile of the note and market conditions. Furthermore, it's important to know how to deal with non-performing notes since these can often be purchased at a lower price but may involve higher risk.

Note investing, especially in non-performing notes, can be profitable but carries a level of risk. However, savvy investors can often turn non-performing notes into performing mortgage notes, thereby maximizing the mortgage note's investment potential.

Another avenue of note investing includes flipping notes. In this process, note investors buy mortgage notes, often non-performing ones, at a discounted price, work to make them performing notes, and then sell them for a profit.

Selling mortgage notes involves finding potential mortgage note buyers or note investing companies, establishing a fair price, completing due diligence, and closing the transaction securely. Often, selling a mortgage note involves providing a lump sum payment to the seller.

Key takeaways:
Buying and selling mortgage notes from banks primarily involves researching the market, networking with banking institutions, and negotiating deals. The process includes verifying the legality of the notes, performing due diligence, and using an escrow service for secure transactions.

Why Do Banks Sell Notes?

Understanding why banks sell notes is crucial to comprehending the opportunities and advantages available to businesses interested in buying mortgage notes. Banks sell notes for various reasons, including:

  1. Recapitalization: Banks often sell performing loans to recapitalize their funds and provide liquidity for further lending. This allows them to free up capital and continue their lending activities.
  2. Risk Mitigation: When banks hold non-performing or sub-performing loans, they face potential liabilities and legal risks. Selling these notes helps mitigate those risks and avoid potential complications associated with foreclosures or property management.
  3. Operational Flexibility: Unlike private investors or funds, banks have certain regulatory restrictions and limited flexibility in loan workouts and restructuring. Selling non-performing loans provides them with more flexibility and reduces the burden of managing distressed assets.
  4. Cost and Time Efficiency: Foreclosing on properties and selling real estate-owned (REO) assets can be time-consuming and expensive for banks. By selling non-performing loans, banks can quickly recover their capital, eliminate legal fees, compliance costs, and minimize the time and effort involved in the foreclosure process.

Types of Mortgage Notes Sold by Banks

When considering buying a note from a bank, it's essential to understand the different types of mortgage notes available. Banks sell various note types, including:

  1. Performing Notes: These are loans where borrowers are making regular payments as agreed upon in the loan terms. Performing notes are considered lower risk and provide a steady income stream for investors.
  2. Non-Performing Notes: Non-performing notes are loans where borrowers have stopped making payments or are significantly delinquent. These notes offer opportunities for investors to acquire distressed assets at a discounted price and implement strategies to rehabilitate the loans or pursue alternative solutions.
  3. Sub-Performing Notes: Sub-performing notes fall between performing and non-performing notes. Borrowers may be making irregular or partial payments, indicating a higher risk of default. Investing in sub-performing notes requires careful assessment and potential negotiation with borrowers to improve payment performance.
  4. Conforming and Non-Conforming Notes: Conforming notes adhere to standard loan guidelines set by government-sponsored enterprises like Fannie Mae and Freddie Mac. Non-conforming or "out of the box" notes do not meet these guidelines and may have unique characteristics or terms, presenting both risks and opportunities for investors.

The Process of Buying a Note from a Bank

Now that we have a better understanding of why banks sell notes and the different types available, let's dive into the step-by-step process of buying a note from a bank.

Step 1: Define Your Investment Objective

Before approaching a bank, it's important to have a clear investment objective in mind. Determine your risk tolerance, desired return on investment, and whether you plan to hold the note long-term or pursue a more short-term strategy such as flipping the note. This will help guide your decision-making process and align your investment goals with suitable opportunities.

Step 2: Identify Potential Banks and Note Listings

To find available notes for purchase, you can explore both private sellers and institutional sellers like banks. While private sellers may offer pricing inefficiencies and lack of regulation, banks often provide more favorable opportunities due to their need to unload non-performing or sub-performing loans.

Research and identify banks that have a history of selling notes or have a significant amount of distressed assets. You can also look for note listings on bank websites, online marketplaces, or through note brokers who specialize in connecting buyers with sellers.

Step 3: Conduct Due Diligence

Once you've identified potential notes of interest, it's crucial to conduct thorough due diligence. Request the mortgage note "tape," which is a datasheet containing essential information about the note. This information includes the borrower's credit score, payment history, remaining number of payments, interest rate, and maturity date.

Review the tape carefully and assess the risk-reward profile of the note. Consider factors such as the property's location, condition, market value, and the borrower's financial stability. This information will help you make an informed decision and determine your bid price.

Step 4: Establish Contact with Decision-Makers

To streamline the buying process, try to position yourself directly in front of the bank's decision-makers. By showcasing your serious intent and investment plan, you increase your chances of getting their attention and accessing more favorable deals. Avoid getting caught in customer service loops, and instead, aim to speak directly with individuals who have the authority to negotiate and close deals.

Step 5: Determine Your Bid Price and Make an Offer

Based on your due diligence and analysis, determine your bid price for the note. Consider the note's risk profile, potential returns, and any additional factors that may influence the value. It's important to strike a balance between offering a competitive price and ensuring a suitable return on investment.

Make a formal offer to the bank, outlining the terms and conditions of your bid. Be prepared for negotiations and potential counteroffers. Remember to remain flexible and open to adjusting your bid if necessary to secure the deal.

Step 6: Perform Legal and Financial Analysis

Once your offer is accepted, it's crucial to perform a thorough legal and financial analysis of the note and associated documentation. Engage the services of a qualified attorney or legal professional who specializes in real estate transactions to review the note, title documents, and any relevant contracts.

Additionally, conduct a comprehensive financial analysis to ensure the viability of the investment. Consider factors such as cash flow projections, potential risks, and exit strategies. This analysis will help you make an informed decision and mitigate potential legal or financial pitfalls.

Step 7: Close the Transaction

Once all legal and financial aspects have been reviewed and approved, it's time to close the transaction. Work with your attorney or closing agent to ensure all necessary documents are properly executed, funds are transferred, and ownership of the note is officially transferred to you.

Step 8: Implement Your Investment Strategy

After the transaction is closed, it's time to implement your investment strategy. Depending on the type of note and your investment objectives, you may choose to work with the borrower to rehabilitate the loan, pursue foreclosure proceedings, or explore other options such as loan modifications or refinancing.

Ensure you have a well-defined plan in place and the necessary resources to execute it effectively. Regularly monitor the performance of the note and make any necessary adjustments to maximize your returns.


Buying a note from a bank can be a lucrative opportunity for businesses looking to invest in real estate without the responsibilities of property ownership. By understanding the reasons banks sell notes, the types of mortgage notes available, and following a systematic process, you can navigate the complexities of buying notes from banks and make informed investment decisions.

Remember, thorough due diligence, legal and financial analysis, and the establishment of a well-defined investment strategy are key to success in this endeavor. Always seek professional advice and stay informed about market trends and regulations to ensure a successful and profitable investment journey.

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What Is a Real Estate Note Buyer?


What Is a Note Deal In Real Estate?


What Are The Risks Of Buying Real Estate Notes?

Investing in real estate notes is not without danger. These dangers include the potential for the homeowner to stop making loan payments, which could result in financial loss for the investor in the note. The investor can suffer financial loss if the property is put up for auction and sells for less than they paid for the note.‍

Who holds a mortgage note?

The mortgage note is the legal document that proves ownership of the mortgage loan to the lender or investor. A mortgage-backed securities investor is one potential buyer of a note that has been sold by the original lender. Payments due from the borrower are to be made to the note holder, who may also opt to sell or transfer the note to another person. The capacity to collect mortgage payments or foreclose in the case of default is dependent on the lender's ability to track down the note's current holder.

What else is a mortgage note called?

Promissory note, real estate lien note, and deed of trust note are all terms that can be used to refer to a mortgage note. Both of these names relate to the same thing: a legally binding agreement outlining the terms and conditions of a mortgage loan. Mortgage notes can have different terms based on the lender, the borrower's credit, and the mortgage agreement. Borrowers and investors in the mortgage note market would do well to familiarize themselves with these various terminologies.

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