Real Estate IOU
In simple terms, a real estate IOU is a note that says you own real estate. If you borrow money to acquire it the IOU is made payable to the lending source and becomes void when the loan is paid in full.
When it comes to investing, a real estate IOU can be bought or sold. Some investors specialize in buying cash flow notes at deeply discounted prices and reselling for profits. Others sell notes when they need cash for a more lucrative investment opportunity. Yet others buy notes as a way to generate consistent cash flow.
There are different types of real estate notes, but the most common are mortgage, deed of trust, and land contracts. When financing is involved, these notes are secured with a promissory note and security instrument.
Promissory notes record the written 'promise to pay' and include details regarding the loan. Security instruments are often in the form of a lien against the property which lets the lender take possession if the buyer defaults on the terms of the contract.
Due to the fact that real estate liens are a matter of public record they must be filed with the county recorder's office. Once the debt is paid a satisfaction of lien is filed to show encumbrances against the property have been removed.
Mortgage notes and trust deeds are similar, but with one major difference. States that invoke judicial foreclosure use mortgage notes, while trust deeds are used in states with non-judicial foreclosure.
A deed of trust includes a third party known as the Trustee. This person or entity is granted the right to sell property without court approval in the event that the borrower defaults on loan payments.
Judicial foreclosure is more lengthy and costly because court hearings take place unless borrowers enter into a deed in lieu of foreclosure or short sale agreement.
For all intents and purposes, a land contract is simply a real estate note used to finance land. Once buyers satisfy their IOU the seller hands over the property deed.
One of the more popular real estate note investments is seller carry back trust deeds or mortgages. Seller carry back financing is not a new method, but has become more popular in recent years. Much of this stems from the fact that it is more difficult to qualify for a home mortgage loan.
This type of financing isn't much different than taking out a loan at the bank. The only difference is installments are remitted to the owner. A mortgage note or trust deed will be secured with a promissory note. Property owners can initiate foreclosure if buyers default on mortgage terms.
Property owners who no longer want to carry the note can sell it to a private investor or investment group. This is a great way for investors to obtain instant cash flow without substantial risk.
These are just a few ways to invest in real estate IOU notes. At Simon Volkov, we have compiled an exhaustive article library covering a wide range of personal investing topics. Click here to learn more about investing in real estate and cash flow notes.