The Potential in Paper

By Matt and Angela Fagerness

The serious money in real estate is on the side of the lenders who hold the loans

Savvy real estate investors rarely pay cash for property; most of the time, there’s going to be a mortgage loan involved. When you consider all the real estate out there that is changing hands on a regular basis, you’ll realize that the sum total of real estate loans outstanding is well into the trillions of dollars. In fact, many real estate investors who buy and sell properties early in their investing careers eventually move into the lending business because this can be a more passive source of income that is still secured by real estate.

In what’s known as the “paper business,” loans (or notes) are bought and sold by investors, both individual and institutional. The term “discount note” refers to the process of a note holder (lender) selling the right to collect payments on a note for a cash sum that is less than the full amount of the original note, and often less than the full amount of the current balance. For example, a note issued five years ago for $100,000 with a current principal balance of $96,000 might be sold for a discounted cash sum of $85,000. The sale of the note puts the buyer in a position to collect the principal and interest payments on the note for the remainder of its term.

What kind of notes can be discounted and sold?
Any promise to pay, be it for services, consumer goods, automobiles or real estate, can be discounted and sold, provided the terms of the note do not prohibit its sale. A common example of note discounting is lottery winnings. When the prize is paid out over 20 or 30 years, a note buyer may offer the lottery winner a one-time payment that is less than they would otherwise receive, then the buyer collects the payments over time and profits from the discount.

Real estate notes are sold every day. Chances are, if you obtained a real estate loan through a mortgage broker recently, your loan was sold the same day it closed. In fact, it’s quite common for mortgage loans to be sold multiple times before they are paid off.

How can you profit from the discount note business?
Investors can profit from the discount note business in two primary ways. One is to buy the notes at a discount and profit as the payments come in. However, this typically requires large sums of cash and may not be practical for new investors. The second way to profit is by facilitating the sale of notes, which is much less cash-intensive. By finding notes that can be purchased at a discount and then by finding buyers willing to pay more than what you negotiate, you can act as a broker, making money simply by locating the deals and bringing the buyers and sellers together.

Get started by identifying local, regional, and national note buyers, then learn the techniques for finding notes that can be discounted. Notes held by individuals, such as seller-financed mortgages, personal loans, etc., are the type that will be easiest for you to find and arrange to buy or broker. A strong marketing program is an essential element of any note buying or brokering business.

As with real estate investing and any other wealth-building strategy, investing in discount notes and mortgages can be very lucrative but requires education and effort. Learn the business and enjoy the results.

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Matt and Angela Fagerness are successful real estate investors and trainer/mentors with Wealth Intelligence Academy®. They will be teaching the upcoming advanced training course on Negotiation and Advanced Closing Techniques. For more information about this course, training for discount notes and mortgages, or about the mentor program, visit www.wiacademy.com.

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