Real Estate Investors Association of Greater Cincinnati

The 4 Cs of Buying Notes



Marco is a buyer of seller-financed notes and mortgages who is also a member of our amazing national community of real estate entrepreneurs. He’s co-teaching the all-day workshop on getting started in buying notes in late February and is the author of a weekly “Seller Finance” e-letter.

        Like many other members, I attended the excellent Saturday Workshop taught by Robert Mohon called, “The Ultimate Credibility Package.”

        One of the things I learned was all bankers are taught the four Cs of lending money: things they look at when considering whether to make a loan. These are:

  1. Credit
  2. Collateral
  3. Capacity
  4. Character

        This made me think about the differences between lending money and buying seller financed loans that someone else already made, which is what I do. I came up with these four Cs for Note Buyers:

  1. Credit
  2. Collateral
  3. Capacity
  4. Conditions

        These are all crucial for deciding WHETHER to buy, and how much to pay for, any note you might be offered. So let me break them down:


        Seller financed note buyers review each payor’s credit report. Beyond FICO score, it shows their history managing credit and making payments consistently. It also notes bankruptcies in the last 7 or 10 years, and foreclosures in the past 7 years.

        You’ll notice that #4 on the banker school list is Character while mine is Conditions. Why the difference? Because lenders have a good amount of direct interaction with potential borrowers and can judge character from those interactions. Do they act arrogant, deliver requested items quickly, show they are organized, and so on?

        On the other hand, note buyers have little to no interaction with the payor of a seller financed note prior to buying a note, but the credit report tells a story. The closest we can come to deducing character is by reviewing the credit report and seeing what it tells us about how seriously they take their financial obligations, and whether they’re willing and able to pay their bills now, and in the past.


        As I’ve written before, the ultimate “payor” of any secured note is the collateral itself. Should the payor stop paying, the collateral is what, through foreclosure or a deed in lieu of foreclosure, pays back the note holder’s investment.

        That’s why note buyers make sure they know what the collateral is worth, what they could sell it for in its current condition, and that there are no title problems that might complicate a foreclosure or a deed in lieu of foreclosure.

        This due diligence includes running real comps, finding out what we can about the last known condition
of the property and, of course, a title search to verify the position of the mortgage we’re buying and whether there are any other liens on the property.


        What is the payor’s ability to make payments? Do they hold steady work? Is it seasonal or impacted by an economic downturn?

        Unlike a bank, I don’t get a loan application with employment data, nor can I call employers for verification. That doesn’t mean I don’t ask questions along the way.

        Often, the seller of the note knows a lot about where the payor works, and how much he makes. And one of the advantages of buying seller-held notes is that it’s sometimes possible, with the permission of the note seller and the payor, to interview the payor before closing about his employment situation.


        Real estate secured notes and contracts are bought and sold in the secondary market. Interest rates, real estate market conditions, and economic factors all influence the value of a given note at a given time and certainly influences whether they’re marketable if I want to resell them.

        An increase in values in any given area might make the note more secured and therefore more valuable. A decrease does the opposite. An increase in rates on other fixed rate investments, like CDs or treasury bonds, might cause potential note buyers to want a higher return on notes, meaning that the cash value (and thus my offer) goes down. A dropping interest rate environment might increase what I can offer on any given note. A recession raises the risk that the payor might lose their job and the loan might default, particularly if their field is impacted a lot, and that means a higher risk and a lower cash value.

        If you’re going to be in the business of investing in and/ or buying or selling notes and mortgages, you MUST learn how to evaluate the 4 Cs fully and completely. They’re the keys to your success.

Be the First to Comment: