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Should You Buy Discounted Notes? Advice From an Investor

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In real estate notes investing, you will come across different strategies; some can work for you, others will not. To understand which one works best, it’s necessary to learn about these processes.

Our today’s agenda is to discuss discounted notes, why to buy/ sell it, and how to buy it.

Discounted notes are those real estate notes available for a lesser value than the current one. These notes are sold in special situations, because normally, you will get these notes at the estimated values. So, no, you may not see them whenever you want them to, and wherever you need them to be.

When will a seller sell these notes at low prices?

On the face value, it does not make sense. But, there are reasons for which a seller (you, for instance) may need to sell these for low prices.

Number 1: When they encounter complications

The notes may possess some risks, which are not addressed in the previous evaluation.

Number 2: Seller might need the cash at that point

Real estate notes deliver values with time. But, in some cases, the seller might need the liquidity right now.

Read Also: Private Lending: Note Investment Training: Session 2

You can get discounted notes from both institutional and private sellers. But why would they sell these items?

In this part, we will discuss that point. Banks, normally, do not sell notes at low price points. Unless there’s some issue with the liquidity and other reserves, then no banks will not do it. In some cases, the banks may have to deal with debt situations.

From the cash generated from the selling, banks can continue the lending operations. There’s a catch, however. They don’t want to compromise too much on the liquidity or too little can be damaging, as it can lead to mortgage default. If this happens, the bank is forced to sell these notes.

Banks sometimes sell non-performing notes at discounted rates, when they think these are their liability and not assets. This method is mainly used as a last resort, to minimize the overall losses and cover expenses.

So, now you know why a bank would like to sell a note at lesser profits. They want to get rid of these notes as soon as possible.

A private note investor might sell these notes for similar reasons. Ok, there might be small differences.

For example, a seller might sell if they see that the notes are termed delinquent. Or, if they don’t know how to proceed, or what to do, then they might want to do this step.

Sometimes, people might change their minds. They may first want to get started in the business, but then hesitate to do so.

It can be due to a genuine lack of interest, time crunch, some other factors, or a combination of all of them. Sometimes, people buy from a relative to be a responsible one, but may later regret it.

In some cases, one might inherit the note from a deceased family member. In most cases, they keep it in their possession. However, they might sell it to get instant cash and use it for various purposes.

Inheriting a note from a family member after they passed and prefer cash now than payments over time. In other words, they might need it, for solving liquidity issues.

Some investors say that dealing with these notes is nothing less than a headache. Talking with borrowers, listening to their arguments, countering them, may seem a bit too much. And measures like forfeiture, and foreclosure can be very challenging and demanding. So, it’s best to get rid of them as soon as possible.

In some cases, customers within the marketplace may demand discounted notes. They might figure out the problem, or may have other reasons to do so.

Now, what will you do if you don’t get the right price for your notes? You will have to settle for lower prices, isn’t it right? That’s the same for those sellers too.

What do I think about buying a mortgage note at a discounted price? Worth it. If you want to know why, stick around till the end.

  • You will get valuable notes at lower prices (what better incentive do you need?)
  • These notes have better yields or returns. This means you get a lot of value for your money. If you can strategize accordingly, then you will get sufficient refunds, according to the TMV formula (Time Money Value).
  • With inflation, the price of these notes can inflate, and it can be beneficial for you.

If you can check the notes before purchasing, you can acquire valuable assets. Now, you decide how to proceed with them. Do you want to save them for future use? Do you want to sell them, or build a portfolio of more notes?

An use case:

This is what happened to me, and several investors have faced similar situations. Last year, I purchased some mortgage notes from a private seller.

These notes were of commercial space, and would usually be priced higher. But due to some disputes, the seller wanted to sell them at discounted rates. For me, it was ($1,50,000, 25% less than the original price). The main reason behind selling them was liquidity. Also, the seller could not make them perform, as much as he had hoped.

I made some changes to those terms, and hold on to it. Slowly, I started seeing results, I was getting 10% more returns than the original note holder. What he considered as a liability, became an asset for me. I sold those notes after 3 years at a much higher price.

Watch: Note Investing with Mike

Now, you may get a better deal than the scenario mentioned above, or not. You need to keep scouting for the best ones to buy and sell Real estate notes with the most value.

If you want to but these notes, you just need to know the right place, and the right strategy to do it. For more guidance on this matter, stay tuned for further information.

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