Are you new to investing in real estate notes or wanting to sell your note? Don’t get confused by the industry terminology.

To help you make sense of what you’re reading, we have compiled a list of common note-buying terms.

There’s certainly more to investing than just knowing the lingo, however, it’s nonetheless a significant first step and will help you to better understand your options.

While not a complete list, here are a few note-buying terms that every note owner and note investor should know…

Contract for Deed (Land Contract)

In a Contract for Deed transaction, the seller continues to hold legal title to the property until the note has been paid in full. Contracts for Deed, also known as Land Contracts, are more common in some states than others. Most note investors prefer Mortgage or Deed of Trust transactions over the Contract for Deed.

Deed of Trust

A Deed of Trust is a lien on the property. The Deed of Trust security document designates a third-party Trustee to hold legal title to the property until the note is paid in full. The Deed of Trust is most often used in non-judicial foreclosure states (instead of a Mortgage).

Discount

The discount is the difference between the unpaid principal balance (UPB) 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. The discount allows the note investor to achieve their desired yield while offsetting the various risks associated with the debt. Virtually all seller-financed notes are sold at a discount from their unpaid principal balance.

Due Diligence

Due diligence refers to the homework or research that note investors must undertake before purchasing a real estate note. This critical process includes verifying all of the terms, risk factors, and payment history of the real estate note. Research must be done on the “paper” (note terms, legal quality), the “property” (home’s location, current value) and the “payer” (borrower’s credit, payment history).

Face Rate

Simply put, the interest rate. The face rate is the interest rate listed on the face or front of the original promissory note. Once agreed upon by the property seller and buyer, the face rate cannot be changed unless agreed to in writing by both parties.

ITV (Investment to Value)

Investment to Value (ITV) is one indicator of the likelihood an investor will get their money back should the payer default on the loan. To calculate ITV, a prospective note buyer divides the amount to be invested for the purchase of the note by the property value. A lower ITV typically reduces investor risk.

LTV (Loan to Value)

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 on their loan, especially if they face financial challenges in the future. To calculate ITV, add all of the outstanding loan balances on the home and divide it by the property value. The lower the LTV (i.e., the higher the equity), the less likely on average 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

The saltiness of the loan. Just kidding! Note “seasoning” refers to how long payments have been made on a real estate note. Any significant interruption of on-time payments by the payer will reset the seasoning. Note investors typically prefer notes to be seasoned for at least 12 consecutive months, although this isn’t a hard-and-fast requirement for all note sales.

Partial Note Purchases

When selling or investing in real estate notes, it doesn’t always have to be an all-or-nothing proposition. Note holders 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. Partials are a great solution when the note holder needs a specific amount of cash now, but doesn’t want to sell the entire note at a deeper discount.

Payer (or Payor)

The payer is the individual or entity making payments on the note. They are also referred to as the maker, the borrower, or the property buyer on a seller-financed note.

Performance

The performance of a real estate note refers to the quality of the payer’s payment history. This factor plays a significant role in determining the fair market value of a note.

If monthly payments are current (up-to-date, mostly on-time), then the note is classified as performing.

If the payer has missed a few payments along the way or tends to be sporadic or habitually late with their payments, it could be classified as sub-performing.

If the payer has not made payments in quite some time, it’s considered non-performing.

Promissory Note (Note)

A signed document that is a promise and obligation to repay money. The note states the terms of repayment including the amount of the debt, interest rate, payment amount, and the date the loan must be paid in full. The note is typically not recorded with the county, so it’s very important that the seller keep the original note in a safe place.

Seller-Financing (or Owner-Financing)

A home-financing method in which the buyer is allowed to make periodic payments to the seller rather than obtain a traditional loan from a bank, for example. The seller in essence becomes the bank for this transaction. The terms of the financing are completely decided by the seller and buyer.

UPB (Unpaid Principal Balance)

The total amount owed on a note at any given point in time, sufficient to satisfy repayment of the note in full. The UPB of an amortized note is reduced each time the borrower makes a regular payment. Notes are bought by investors based on the UPB at the time of purchase.

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 profitably purchasing or selling the real estate note.

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