Why buy a commercial mortgage note?

 Real estate is a powerful investment, because it’s considered an imperishable asset. There’s another aspect of the property market that is just as profitable, if not more so. That is, the purchasing of commercial mortgage notes. Commercial notes, like other notes, are an attractive investment because they are backed by real estate. Purchasing a note has several benefits, including the provision of steady income with risks that are manageable. A commercial note can provide a tidy return if you have the right help.

There are many different options available to those who are ready to invest in commercial notes.  That is why having an experienced broker available to walk you through the process is a good idea. We can sell you a note directly or match you with another seller who will.

As a buyer, pay attention to the loan to value (LTV) which answers questions about the equity and determines the risk. The investment to value (ITV) helps you minimize that risk. Remember that the seller sets the LTV during the original financing process with the borrower, so it cannot be changed.  Therefore, as a buyer, you want to reduce risk and decrease your exposure.

This changes if it is not the first position on the residential, commercial, or business note. There might be senior debt? If the purchase is for a second lien, then you add the balance of the first lien to the investment amount and then divide the Value of property. Be aware that second lien buyers have additional restrictions and calculations.


What are the investment options for buyers?

Buyers have some flexibility when it comes to buying notes and can make their purchases according to the amount of risk each person is willing to take. It’s essential to understand how notes are valued.

Notes with higher equity are obviously prime targets. However, there is also the length of time left on the note that drives the decision, as well as the balloon payment, the condition of the property, and whether owners are reliable. In other words, do they make mortgage payments on time and do they pay their taxes. The answers to these questions and the amount of risk a buyer is willing to take provides guidance for the type of purchase to choose:

A full purchase – The most popular type of investment is called a full purchase. This simply means that a buyer has chosen to buy the entire mortgage note, or whatever amount of time remains on it. If someone holds a note for five years before finally deciding to sell, a buyer can purchase the 300 months of payments left on the 30-year mortgage note. As the buyer, you are making a full purchase.

Payments only – As the buyer, you might choose to purchase the remaining time left on the mortgage note and nothing else. In other words, the procurement excludes the balloon payment.

This time you find a seller who is due a large balloon payment in the amount of $45,000. Naturally, you review all the pertinent details of the note. You see there are 200 remaining payments and decide to purchase them. Once you receive all 200 payments, the original seller receives the $45,000 lump sum.

A partial purchase – Buying payments alone is similar to making a partial purchase.  It means that an investor is buying what represents anything less than 100% of an entire note, or all that remains of it.

In this case, you decide to purchase 60 months on a note with 280 payments remaining. After you receive those 60 payments, the mortgage note reverts back to the seller. The seller can sell more time or keep whatever is left of the note. Most partial purchases are made in sets of 60, 120, or 180 months.

You can purchase part or the full value of the balloon payment too.

Split payments – An investor can purchase part of the monthly payments on mortgage note, but it only makes sense to do so if the monthly amounts are high enough. Few investors would go into a transaction to split $1000 monthly payments. However, if the monthly amounts are $4000, the picture changes quite a bit. The amount of the split isn’t necessarily 50/50.  The investor might purchase three quarters of the monthly amount or a third.


There other are other aspects to consider, and a good broker will help you attain the right note, regardless of the interest rate, the length of the terms, or the seasoning.