New to investing in real estate notes or wanting to sell your note? Don’t get stuck on the language.
To help you make sense of the real estate note world, we have compiled a list of common note buying terms.
While there is more to investing than knowing the language, it’s a significant first step and will help you focus on if the investment is right for you.
Common Note Buying Terms
While not a complete list, here are a few note buying terms that every investor should know…
Contract for Deed
In a Contract for Deed transaction, the seller keeps the legal title for the property until the note has been paid in full. Most investors prefer a Mortgage or Deed of Trust transaction over a Contract For Deed.
Deed of Trust
A Deed of Trust is a lien on the property. It involves a third-party Trustee holding the legal title until the note is paid in full. The Deed of Trust is most often used in non-judicial foreclosure states.
Discount
The discount is the difference between the unpaid balance on the note and the amount the investor pays to purchase the note. The amount of discount is determined by the specifics of the note including equity, borrower credit, seasoning, property type, the interest rate of the note, and other terms.
Due Diligence
Due diligence is a fancy term for homework and research. Before purchasing a real estate note, it is an investor’s responsibility to perform their due diligence, verifying all of the terms, risk factors, and history of the real estate note.
Face Rates
Simply put, interest rate. The face rate is the interest rate listed on the face or front of the promissory note from the original loan. Once agreed upon, it cannot be changed unless agreed to in writing by all parties.
ITV (Investment to Value)
ITV is an indicator of the likelihood an investor will get their money back should the payor default.
To calculate ITV, a note buyer takes the amount invested for the purchase of the note divided by the property value.
LTV (Loan to Value)
LTV indicates how much equity the buyer has in the property. This is a significant indicator of the likelihood the buyer will continue paying. To calculate, take all of the outstanding loan balances divided by the property value. The lower the percentage, the less likely the buyer will walk away.
Mortgage
A Mortgage is a lien on the property to secure payment of the debt, note, or loan. States with a judicial foreclosure process usually use a Mortgage (instead of a Deed of Trust).
Note Seasoning
No, we aren’t talking of Paprika and Cumin.
Note seasoning refers to how long payments have been made on a real estate note — it’s age essentially.
Partial Note Purchases
When selling or investing in real estate notes, it isn’t all or nothing. Noteholders have the option to sell some of the note payments to an investor, while also keeping some of the future payments for themselves down the road.
Payor
The payor is the individual or entity making payments on the note. They are also referred to as the maker or the property buyer on a seller-financed note.
Performance
The performance on a real estate note refers to the payor’s payment history.
If monthly payments are current, then the note is classified as performing. If the payor has missed a few payments, it could be classified as sub-performing.
If the payor has not made payments in quite some time and has no plan for repayment, it’s considered non-performing.
Promissory Note
A signed document that is a promise and obligation to repay the money. It states the terms of repayment including the amount of the debt, interest rate, payment amount, and the date it must be paid in full.
Seller Financing (or Owner Financing)
Instead of obtaining a traditional bank loan to purchase a home, sellers can offer owner financing.
Instead of making monthly payments to a banking institution, the buyer makes monthly payments to the seller.
Don’t get lost in the jargon. When investing in real estate notes, it’s essential to know the common terms, allowing you to focus on purchasing a real estate note that makes sense for you.