Yes, you can buy notes from banks, but it’s not as simple as walking into your local branch and making a purchase. Banks sell mortgage notes and other debt instruments to free up capital, but most sales are in bulk to institutional investors. For individual investors, the process requires understanding where to look, what to buy, and how to conduct proper due diligence.
This comprehensive guide covers everything you need to know about purchasing bank notes as an investment, including the different types available, where to find them, expected returns, and the critical risks involved.
What Is a Bank Note (Financial Instrument)?
In the context of investing, a bank note (also called a mortgage note or promissory note) is a legal document that confirms an obligation to repay a specified amount of money. When someone takes out a mortgage, they sign two key documents:
- The Promissory Note: The borrower’s written promise to repay the loan according to specific terms
- The Mortgage/Deed of Trust: The security instrument that gives the lender rights to the property if the borrower defaults
When you buy a note from a bank, you’re purchasing the right to receive the borrower’s monthly payments. Essentially, you become the bank.
Why Do Banks Sell Mortgage Notes?
Banks don’t hold all their loans forever. They sell notes for several strategic reasons:
- Capital Requirements: Banks must maintain certain capital-to-asset ratios. Selling notes frees up capital for new lending
- Risk Management: Offloading non-performing loans reduces risk exposure on their balance sheets
- Liquidity Needs: Converting loans to cash improves the bank’s liquidity position
- Regulatory Compliance: Sometimes selling distressed assets is necessary to meet regulatory requirements
- Strategic Focus: Banks may exit certain loan markets and sell off existing portfolios
Types of Notes You Can Buy
Performing Notes
Performing notes are loans where the borrower is making regular payments as agreed. These are considered safer investments with more predictable returns, typically yielding 6-10% annually. However, banks rarely sell performing notes because they’re generating reliable income.
Non-Performing Notes (NPNs)
Non-performing notes are loans where the borrower has stopped making payments (typically 90+ days past due). Banks are eager to sell these because they:
- No longer generate income
- Require reserves against potential losses
- Need ongoing management resources
NPNs sell at significant discounts (often 40-70% off the unpaid balance) but require expertise to work out successfully. Potential returns can reach 12-25%+ for experienced investors.
Re-Performing Notes
These are notes that were previously non-performing but have been rehabilitated. The borrower is now making payments under modified terms. They typically trade at a discount to performing notes but with less risk than NPNs.
Performing vs. Non-Performing Notes: Comparison
| Factor | Performing Notes | Non-Performing Notes |
|---|---|---|
| Purchase Price | 85-100% of UPB | 30-70% of UPB |
| Expected Yield | 6-10% annually | 12-25%+ (if successful) |
| Risk Level | Lower | Higher |
| Expertise Required | Moderate | High |
| Time Investment | Low (passive income) | High (workout required) |
| Capital Requirements | Higher | Lower entry point |
Where to Buy Bank Notes
1. Online Note Marketplaces
The most accessible option for individual investors. These platforms list individual notes and small pools with detailed information:
- Paperstac: The largest retail marketplace with 9,000+ registered users. Lists performing and non-performing notes. 1% service fee on closed deals
- LoanMLS: Specializes in bulk loan trades but also lists individual notes
- NotesDirect: Beginner-friendly platform with educational resources
- BiggerPockets Notes Marketplace: Community-focused platform for note investors
2. Note Brokers
Note brokers act as intermediaries, purchasing bulk portfolios from banks and selling individual notes to investors. Benefits include:
- Access to off-market deals
- Pre-screened inventory
- Expert guidance on due diligence
3. Directly from Banks
Buying directly requires significant capital (often $1 million+) and industry connections. Contact the bank’s:
- Special Assets Department
- Distressed Debt Division
- Asset Recovery Team
Smaller community banks and credit unions may be more willing to sell individual notes than large national banks.
4. Fractional Note Investing
Some platforms allow you to buy fractions of notes, lowering the barrier to entry. Minimum investments can be as low as $1,000-$5,000, allowing diversification across multiple notes.
Step-by-Step Process to Buy Notes
Step 1: Education and Strategy Development
Before investing a single dollar:
- Learn note investing fundamentals through courses, books, and mentors
- Decide between performing and non-performing notes
- Determine your investment criteria (property types, geographic areas, loan amounts)
- Set a budget and expected returns threshold
Step 2: Source Available Notes
Create accounts on multiple platforms and start reviewing available inventory. Look for notes that match your criteria and budget.
Step 3: Initial Screening
Quickly filter notes based on:
- Price relative to unpaid balance
- Property location and type
- Loan position (first or second lien)
- Payment history
Step 4: Deep Due Diligence
For notes that pass initial screening, conduct thorough research:
- Collateral Review: Order a BPO (Broker Price Opinion) or appraisal to confirm property value
- Title Search: Verify the lien position and check for other encumbrances
- Borrower Analysis: Review payment history and assess likelihood of resolution
- Legal Review: Ensure all documents are complete and enforceable
- Exit Strategy Analysis: Model different outcomes (modification, foreclosure, short sale)
Step 5: Make an Offer and Negotiate
Based on your due diligence, determine your maximum bid. Consider:
- Worst-case scenario (foreclosure costs, holding time, property condition)
- Target return on investment
- Current market conditions
Step 6: Close the Transaction
Once terms are agreed upon:
- Execute the Loan Sale Agreement
- Transfer funds (often through escrow)
- Receive the collateral file (original note, mortgage, payment history, title policy)
- Record assignment of mortgage at the county level
- Set up servicing (self-service or hire a loan servicer)
Expected Returns from Note Investing
Returns vary significantly based on note type, purchase price, and execution:
- Performing First Liens: 6-10% yield
- Re-Performing Notes: 8-12% yield
- Non-Performing First Liens: 12-20%+ (successful workouts)
- Second Liens: Higher risk, potentially higher returns (or total loss)
Example Calculation: You purchase a non-performing note with $100,000 unpaid balance for $50,000. After working with the borrower for 6 months, they resume payments or you foreclose and sell the property for $80,000. Your return would be $30,000 on a $50,000 investment (60% ROI, minus expenses).
Risks and Considerations
Note investing is not passive and carries significant risks:
- Borrower Bankruptcy: Can delay or prevent collection for months or years
- Property Damage: Distressed properties may be in poor condition, reducing collateral value
- Legal Complications: State foreclosure laws vary widely; some states take 2+ years to foreclose
- Title Issues: Unknown liens or title defects can eliminate your investment
- Due Diligence Failures: Missing critical information can lead to significant losses
- Illiquidity: Notes can be difficult to sell quickly if you need cash
Due Diligence Checklist
Before purchasing any note, verify:
- Original promissory note (with all endorsements/allonges)
- Recorded mortgage/deed of trust
- Title search and title insurance policy
- Property valuation (BPO, appraisal, or comparable sales)
- Complete payment history
- Loan modification documents (if applicable)
- Hazard insurance documentation
- Property tax status
- HOA dues status (if applicable)
- Bankruptcy search on borrower
Frequently Asked Questions
How much money do I need to start buying notes?
Entry points vary. Fractional platforms allow investment with as little as $1,000. Individual second liens might sell for $5,000-$20,000. First lien notes typically require $25,000-$100,000+. Buying directly from banks usually requires $1 million or more for bulk pools.
Can I use my IRA to buy notes?
Yes, self-directed IRAs can hold mortgage notes. This allows tax-advantaged growth but requires a specialized custodian. Consult a tax professional before proceeding.
Do I need a license to buy notes?
Generally, no license is required to purchase notes as an investment. However, servicing loans (collecting payments, handling escrow) may require licensing in some states. Most investors hire licensed loan servicers.
What happens if the borrower doesn’t pay?
You have several options: negotiate a loan modification, accept a deed in lieu of foreclosure, pursue a short sale, or foreclose on the property. The best strategy depends on the borrower’s situation, property value, and state laws.
Is note investing better than buying rental properties?
Each has advantages. Notes offer passive income without property management headaches, no tenant issues, and potentially higher yields. However, you don’t benefit from property appreciation, and non-performing notes require active workout efforts.
The Bottom Line
Buying notes from banks is possible but requires education, capital, and careful due diligence. For most individual investors, online marketplaces like Paperstac and LoanMLS provide the most accessible entry point. Start with performing notes or fractional investments to learn the process before tackling more complex non-performing note workouts.
Note investing can generate attractive returns for those willing to put in the work, but it’s not a “get rich quick” strategy. Success requires understanding real estate, lending, legal processes, and negotiation. Consider working with experienced note investors or joining a note investing community to accelerate your learning curve.
