How Real Estate Investors Use Notes (Real Examples)

Do You Know What a Note Is?

Do you invest in real estate?
Have you bought a house?
Helped a client buy a house?

If you said yes to any of those, then you’ve already used a note—even if you didn’t call it that.

“Note” is the short version.
The long version is a Promissory Note—a promise to pay.

What Is a Note?

When you get a loan on real estate, the lender provides the money (or wires it where it needs to go). In return, you sign a promissory note stating that you promise to pay the money back.

That note spells out:

The interest rate
The length of the loan
How it’s amortized
What collateral secures it (usually a house)

To secure that note, a Deed of Trust (in Missouri) or a Mortgage (in Kansas) is recorded at the Recorder of Deeds. This puts the world on notice that the property has a lien against it.

As long as you pay, that lien will eventually be released.
If you don’t, those same documents outline how the lender can get their money back—or take the asset through foreclosure.

You’ve Used Notes Before (Even If You Didn’t Realize It)

Most people are familiar with going to a bank or mortgage broker for a loan.
Some have borrowed from hard money lenders.

Maybe you have borrowed from a friend to fix n flip a house.
Or perhaps the seller financed you.

They all work the same way.

Here in our office, we’ve used—and created—a LOT of notes. Most of our properties were in Missouri, so we recorded deeds of trust.

Once, we accidentally recorded a deed of trust on a Kansas property instead of a mortgage. No one noticed… until it was time to release it. Don’t do that! 😬

That’s when you learn how important the details are.

Buying Our Office with Seller Financing

Other than getting our funding from banks early on, our first non-bank loan deal was when we bought our office building in Waldo and the seller financed us.

We had a down payment and all the right loan documents signed and recorded and we made payments to the seller for a few years. This loan while it had a 30 year amortization period, has a balloon. So we had to pay it off in a few years. Which is when we refinanced it with a traditional lender.

Private Lenders

This is where the majority of our notes came in. We borrowed the purchase and rehab money from many different private lenders. The first one was our insurance guy who came to us after watching us do a few deals and asked if he could get in on the action. If he put up the money for a deal, would we pay him $5,000 at the end.

We took that deal, and several others.

I’m not sure where our paperwork and documentation came from, probably the attorney at our title company. But a year or so after that, we used an attorney at MAREI as a private lender, and we have been using the promissory note and deed of trust he provided ever since.

We have had all sorts of deals with different private lenders to us as borrowers.

And we have been private lenders to others in their deals.

If you see a class at MAREI on private lending – take it and learn it – this will be one of the most valuable pieces of information you tuck away for future reference.

Contracts for Deed

A Contract is exactly what it sounds like a contract between a seller and a buyer where by the terms are detailed out and once the buyer meets all the terms, such as making all the payments, they will get the deed to the house.

The problem is that they are a little more than a lease and not quite a true seller finance situation and most people who use Contracts for Deed download something from the internet or get some document from a friend. And if things to bad, there is probably no easy way to get the house back as eviction law does not apply and foreclosure law does not apply, so the whole issue is then left up to a judge to decide.

I found that out early on as we used a few to sell some crappy little houses during the great recession. Leading into the recession the houses had values between $10,000 and $20,000 which is what we had on our home made contracts for deed. But when the market tanked in 2008 and 2009 and those values went to $5,000 or less and the buyer / borrowers stopped paying, we were up that proverbial creek with out a paddle.

Eviction was not going to work and foreclosure was not going to work and really we didn’t want the houses so we deemed the contract met and deeded them the houses, no evictions or foreclosure needed.

Learning How to Do Notes the Right Way

A year or so after those contract for deed deals finished up, Eddie Speed was the guest speaker here at the local REIA. He was talking about how the note business worked and at that time how to cash in on defaulted notes . . . there were just a few of those out there waiting to be bought.

We went all in, did the Saturday training, went to the bootcamp, did a couple years of mentoring and we actually learned the right way to do a true seller financed note.

We learned:

How to vet borrowers properly
How to document deals correctly
How to protect the investment
How notes really work as an asset

That education changed everything.

The Flip House That Wouldn’t Sell

We had a flip house in Blue Springs that just wouldn’t move.
Price reductions didn’t help. No showings. No offers.

During a NoteSchool mentoring call, we were told to change the marketing to:

“Seller will finance a qualified buyer.” and to ask for “substantial down”

That one change generated phone calls—including the call we needed.

The buyer:

Had $20,000 down
Had income
Had trashed credit
And—according to his credit report—was deceased

(True story. Full case study is on the MAREI blog.)

Creating the Note

At that point, we were facing a loss. Selling outright would have required writing a check.

Instead, we seller-financed the house.

We:

Collected $16,500 cash
Transferred taxes, insurance, and repairs to the buyer
Created a note for $148,500 over 20 years at 8%

If we had held that note to maturity:

240 payments at $1,242.10
Total payments: $298,106
Roughly $176,000 in profit over 20 years

Selling the Note to a Private Investor

Yes you can sell a note (or part of anote)!

We didn’t wait 20 years.

After 21 payments, we sold the note to a private investor.
Total profit for us: $40,000 over 21 months.

Considering we started in a losing position, that was a win.

What the Private Investor Made

The investor bought the remaining 219 payments on a balance of $142,897.

If he had collected all payments, he would have doubled his money in about 18 years—far better than bank CDs paying under 2%.

But the borrower fixed his credit, bought a new house, sold this one, and paid off the note after 28 months.

Investor profit: $32,956
Return: about 11%

All for wiring money and collecting payments.
A servicing company handled everything else.

Seller Financing to a Landlord

We also seller-financed a small rental property to a landlord we met MAREI. Thirty years of mortgage payments to us.

We didn’t want all our cash tied up for 30 years, so we sold half the note to our son.

Each of us invested about $22,000.
Each of us receives $245 per month.

We’ve been paid for about 10 years. At about 8 years of payments we had received ALL of our INITIAL INVESTMENT BACK.

At $245/month, that’s $2,940 per year—or $58,800 over the next 20 years, on just our half. Our son will earn the other half.

Is this getting interesting yet?

Seller Financing With Hard Money (Advanced Stuff)

One of the first KC investors we ever met bought houses on the courthouse steps, then seller-financed them—including rehab money—to other investors. We had a wholesale house that we were able to formulate a similar offering.

Little fixer upper house that we sold and advanced the rehab money to the buyer at closing. He rehabbed the house, sold it and paid us back.

Rough numbers:

We bought for ~$50,000
We sold for $75,000
Plus Lent Rehab ~$30,000
Payoff ~$105,000 plus interest & points

There was a little wrinkle in this one – Our Son’s LLC did half of this deal, bought half the house, sold half the house, advanced half the rehab money, was owed have the loan and received half the payoff. My Self Directed Solo 401k account did the other half.

Scott and my Solo 401(k) were each in for ~$39,000.
About 11 months later, payoff was just over $59,000 each.

Profit: ~$20,000 apiece.

Now think about this – if we would have wholesaled that house, we were going to be lucky to make $5,000 to $10,000. By structuring the deal we did and waiting for about 11 months, we made $40,000 between us.

What could you do with this knowledge in your business?

Could you buy or sell more houses?
Could you make more money on smaller wholesale deals?

These deals are just the tip of the iceburg.

We have several much more complicated, defaulted note scenarios I could share. We’ve been free and clear on those for about five years now, earning a little over $500 per month combined.

Last January, one borrower abandoned the property back to us. We sold it and made about $30,000.
Then in July of last year, another borrower paid off their note, putting another $18,000 straight into our bank account.

Not bad for deals I was told were too risky to do.

I can honestly say that knowing the basics of how you could incorporate notes into your business will change your business, it did for me.

I highly recommend taking advantage of the opportunity right here in front of you by checking out all the Note events coming up:

MAREI Meeting January 13th: Where Jeff Watson from Note School will share why investors are doing more with notes these days and how.

MAREI Workshop January 17: Where Jeff Watson joins us to show us how to be the bank and strategically plan and design your future cash flow.

NoteSchool Events: Plus Noteschool hosts several Note Investing Bootcamps every year and it looks like they are $1997 to attend. But because I am a NoteSchool Student we were able to get a discount code for our members. Use the code MAREI to save you $1,300.

How Real Estate Investors Actually Use Notes in Their Business (Real Examples)