Note Buying

Private lenders, by definition, are in the “note” business. In a typical private lending scenario, a lender issues a note, usually to the party doing the rehab of the house in the case of a “fix and flip” deal, that is secured by the property being rehabbed. When the property is sold, the lender is paid off and the note is satisfied. Of course, if the loan is not repaid according to the agreed-upon terms, the lender may modify the loan or foreclose and take back the property.

With this in mind, it’s easy to see why buying existing notes as an investment class makes sense to many private lenders who are looking for longer-term options. See below for more information on note buying.

At Cleveland Asset Management, we endeavor to match the appropriate opportunity with a private lender’s comfort level and preferred time frame. The graphic below represents several of the options we have available.

Duration of Transaction Dictates Transaction Type

Fix & Flip

1–2 years

Lease Option Strategy

1–3 years

Seller Finance Strategy

1–5 years

Long Term Note

6-30 years

Note Buying Basics

Defined: Residential real estate notes or loans are “IOUs” secured by real estate.

When a borrower is paying their note as agreed, the note is considered to be “performing.” When the borrower stops paying, the note is classified as “non-performing.” A non-performing note that returns to paying status is considered “re-performing.”

Notes are further classed by lien position, e.g. first liens (mortgages) or junior/subordinate liens (equity line of credit, etc.). Typically first liens are priced higher than notes secured by junior liens but may be less risky, whereas notes secured by junior liens are often priced lower and come with greater risk but may balance that by having greater upside potential.

Benefits of investing in notes

Purchasers buy performing notes because they provide predictable cash flow and don’t come with the common challenges of being a landlord, i.e. with a note, there are “no tenants, termites, or toilets.”

Purchasers buy non-performing notes based on their assumptions about the potential value of the underlying assets (“the house”) and/or the value of getting the note to “re-perform,” i.e. working out a solution with the borrower to resume making payments. It is also possible to receive a lump sum payment from a borrower to cover arrears.

Likewise, while there are different factors to consider when purchasing first or junior lien notes, both types of notes are secured by the underlying real estate. When comparing to other types of asset classes you may have in your investment portfolio, having those that are secured by underlying collateral generally reduces the risk threshold of your overall portfolio.

What this means for you

Cleveland Asset Management sells performing and non-performing notes.

Whether you are interested in acquiring first lien or junior lien notes secured by residential property, we have a wide selection to choose from.   We specialize here, but we work nationwide, our collateral is in diverse geographical territories, which allows note buyers to diversify their risk when holding these types of longer-term assets.

If you are interested in buying notes from us, please contact us using the form on this page.

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