Investing in “Notes” is where you are buying a contract that “promises” to pay you a stream of income payments. The key word is ‘promise’, is it not a guaratee. For the sake of this discussion, we will focus on Notes secured by real estate.
Terms that you will need to become familiar with are “Trust Deed”, “Deed of Trust” or “Mortgage” (can be used interchangebly) are the security instrument that gives the investor the necessary “collateral”.
Many investors like secured notes because it offers a level of safety. I must caution here that you have to know what you are doing here to achieve that level of safety. As a Note investor, you do have the recourse to sell the collateral (the underlying real estate) to protect your investment if the payments aren’t paid per the agreement.
Below are some handy definitions used in the industry:
Performing notes: They are by definition a note where the borrower is making payments on the note as agreed.
Non-performing notes: These are notes where the borrower is not paying according to their agreement & in many cases are in default.
BPO: Brokers Price Opinion-an opinion of property value from a real estate broker.
FMV: Fair Market Value- an opinion of value if marketed properly to the general public
ITV%- Investment to Value. This is often displayed as a percentage. The key question here is, how much would an investor pay for a note as a percentage of the value of the asset.
UPB: Unpaid balance – the remaining balance due on the note that the borrower owes the lender.