Who Buys Discounted Notes?

A Comprehensive Guide to Note Buyers

The world of real estate investment is vast, and one of its more niche but lucrative corners is the buying and selling of discounted notes. But who buys discounted notes, and why? Whether you’re a note holder looking to sell or an investor exploring new opportunities, understanding the market and the players involved is key.

buyer and seller shaking hands, completing owner financed sale

In this post, we’ll explore the following:

  • What are discounted notes?
  • Who buys discounted notes?
  • Why do buyers purchase these notes?
  • Key considerations for note buyers
  • The process of buying a discounted note

What Are Discounted Notes?

Discounted notes, also referred to as “promissory notes” or “real estate notes,” are financial instruments tied to debt. Essentially, these are IOUs where a borrower agrees to pay back a lender with interest over a set period. When these notes are sold at a discount, it means they are being purchased for less than the current balance owed by the borrower.

The discounted rate attracts buyers because they stand to make a profit by receiving payments on the full loan balance while only investing a portion of that amount upfront.

Types of Discounted Notes

  1. Performing Notes: These are notes where the borrower is making regular payments. They are less risky and typically offer lower discounts because they’re steady income streams for the buyer.
  2. Non-Performing Notes: These are notes where the borrower has fallen behind on payments or stopped paying entirely. While riskier, these notes can be purchased at steep discounts, allowing buyers to potentially turn a profit through foreclosure, loan modification, or other recovery strategies.
  3. Sub-Performing Notes: These notes are somewhere in the middle, where borrowers may be paying sporadically or less than required. They are discounted but not as severely as non-performing notes.

Who Buys Discounted Notes?

Many individuals, especially those with experience in real estate or financial markets, buy discounted notes as part of a diversified investment portfolio. These investors are typically looking for higher returns than they might find in traditional investments like stocks or bonds.

1. Note Buying Companies and Individual Investors

  • Why the entities Buy Notes: They are often drawn to the ability to create passive income through borrower payments or by reselling the note at a higher value. Some individuals specialize in purchasing non-performing notes with the aim of foreclosing on the property or negotiating new payment terms with the borrower. American Funding Group is an established 3 decade note buyer.
  • If you are holding a real estate note and would like to sell, you can start here:

I'd like BEST PRICE for ALL or PART of My Note

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What Note Sellers have said about dealing with us: 

What is a note buyer? American Funding Group

It’s very important to us that when you are selling a note that you have a great experience. We are very proud of our American Funding Group testimonies. In the end, we’re not happy if you’re not happy.  So, check out what others have said about us.

One of our customers, A.C. Of Rochester, NY, had this to say: “American Funding Group, we want to send you a special thanks for your kindness, promptness and thoroughness in the way you handled our transaction. We were more than satisfied and will recommend you highly in the future.” 

What is a note buyer? American Funding Group

“The cash settlement you gave me exceeded my expectations. I would not hesitate one moment to recommend you.“ J.S., Ft. Worth, Texas

“The transaction was handled very well. We appreciate the way you were able to overcome the problems, particularly the lack of cooperation of the payor. Great job! “ J. & B. M., Palm City, FL.

2. Private Equity Firms

Private equity firms often buy discounted notes in bulk, making this type of investment more scalable. They typically have the resources and expertise to manage a portfolio of notes, whether performing or non-performing.

  • Why Private Equity Firms Buy Notes: They leverage economies of scale and tend to have teams that handle the various legal and financial intricacies of managing these investments. They seek both short-term profits from flipping notes and long-term income from performing notes.

3. Hedge Funds

Hedge funds are known for taking on higher risk in pursuit of greater returns, making discounted notes—especially non-performing ones—a good fit for some funds. Hedge funds that focus on distressed assets may buy non-performing notes in large quantities, betting on their ability to recover value through foreclosure, sale, or restructuring.

  • Why Hedge Funds Buy Notes: Hedge funds can absorb the volatility and risk of non-performing notes, aiming for significant returns from distressed asset recovery. Some funds are focused specifically on distressed real estate and debt markets.

4. Banks and Financial Institutions

While banks typically issue loans rather than buying discounted notes, some financial institutions do engage in this secondary market. Often, smaller regional banks or credit unions will buy discounted notes as a way to boost their balance sheets.

  • Why Banks Buy Notes: They may see note purchasing as a low-risk way to acquire additional assets, especially if they have the expertise to handle non-performing loans. Some banks also buy notes that are performing, seeking steady income through interest payments.

5. Real Estate Investment Trusts (REITs)

Some REITs, especially mortgage REITs, invest in discounted notes as part of their portfolio. These trusts are designed to generate income for their investors through various real estate investments, including notes.

  • Why REITs Buy Notes: REITs are attracted to performing notes that provide a steady stream of income. Mortgage REITs, in particular, focus on the interest income generated by these investments.

Why Do Buyers Purchase Discounted Notes?

Attorneys reviewing the owner financing documents

The primary reason anyone buys a discounted note is the potential for profit. However, there are multiple ways that note buyers can make money, depending on their investment strategy:

  1. Interest Income: For performing notes, the buyer collects regular interest payments from the borrower, creating a steady income stream. Since the note was purchased at a discount, the yield on their investment is often higher than traditional loans or bonds.
  2. Reselling the Note: Some buyers are not interested in holding the note for the long term. They may purchase a note at a discount and then sell it at a higher price to another investor or institution, pocketing the difference.
  3. Foreclosure or Property Acquisition: For non-performing notes, buyers may pursue foreclosure to acquire the underlying property. If the property’s market value is higher than the purchase price of the note, this can result in significant profits.
  4. Loan Modification or Restructuring: Buyers may work with the borrower to restructure the loan, offering new payment terms that make it easier for the borrower to catch up. This can turn a non-performing note into a performing one, increasing its value.

Key Considerations for Note Buyers

Before jumping into the world of note buying, investors should be aware of several key factors:

  1. Risk vs. Reward: Non-performing notes are riskier but offer the potential for higher rewards. Performing notes are generally safer but provide lower returns. Investors need to balance their risk tolerance with their desired returns.
  2. Due Diligence: Proper due diligence is essential when buying notes. This includes understanding the borrower’s financial situation, the terms of the note, and the property securing the note (if applicable). Investors should also research the local real estate market to assess the value of the collateral.
  3. Legal Considerations: Buying notes often involves navigating complex legal and regulatory issues, especially when it comes to non-performing notes. Investors should be prepared to deal with foreclosure proceedings, borrower disputes, and other legal challenges.
  4. Exit Strategy: Successful note buyers always have an exit strategy in place. Whether it’s holding the note for steady income, reselling it, or foreclosing on the property, investors should know how they plan to realize their return on investment.

The Process of Buying a Discounted Note

man signing deed in owner financing transaction

The process of buying a discounted note can vary depending on the type of note and the buyer’s goals, but here’s a general overview:

  1. Identify the Note: Investors can find notes through various channels, including online marketplaces, auctions, banks, and direct from note holders.
  2. Perform Due Diligence: This involves reviewing the note’s terms, the borrower’s payment history, and any collateral securing the loan. Investors may also consult with legal and financial advisors.
  3. Negotiate the Purchase: Once an investor has completed their due diligence, they can negotiate the purchase price of the note. The discount will depend on factors like the note’s performance, the borrower’s financial status, and market conditions.
  4. Close the Deal: After agreeing on terms, the buyer and seller will finalize the transaction, typically through a third-party service that handles the transfer of the note and funds.
  5. Manage the Investment: Once the note is purchased, the investor must manage it, whether by collecting payments, working with the borrower to modify the loan, or pursuing foreclosure.

In Summary:

Buying discounted notes can be a highly profitable investment strategy, but it’s not without risks. Whether you’re an individual investor looking to diversify your portfolio or an institution aiming for large-scale returns, understanding who buys discounted notes and why is key to navigating this niche market. With proper due diligence and a clear investment strategy, note buying can offer significant opportunities for profit.


I'd like BEST PRICE for ALL or PART of My Note

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