I found a very readable U.S. News article written by Joel Cone about Real Estate notes. Here’s a quick synopsis followed by a link so you can read the entire article.
After three decades in the home improvement, real estate development and then mortgage business
Silver Spring, Maryland-based real estate entrepreneur, Don DeMarco, decided it was time for a change. In 2014 he found another viable option to make money based on the current state of the market by investing in real estate notes.
Why notes? One key reason to focus on buying notes in the present market is simply because there are so many of them out there following the nation’s most recent foreclosure crisis that began in 2006.
RealtyTrac reported that, at the end of 2014, there were still more than 7 million residential homeowners seriously underwater in this country, representing 13 percent of all properties with a mortgage. Those underwater homeowners mean the supply of real estate notes available at discounted prices has not dried up yet.
Another reason is there are a greater number of exit strategies available to note buyers than simply purchasing the asset, fixing it and flipping or renting it. According to Scott Carson, president of WeCloseNotes.com. “you’re buying debt well below what a retail investor would pay. You create a win-win with the homeowner, and more often than not, it turns into a really good yield for us.”
“Whether the investor’s goal is to build up a high-yield portfolio of passive investments, or a portfolio of rental properties, or a combination of both, working with financially distressed borrowers who are not paying their mortgages holds a great potential upside, but not without risk.
“‘Notes do offer the potential for a good rate of return on investment, but investors going into the note-buying business must go in with their eyes wide open, because not all note deals are winners. Just like buying homes in a bidding war or online auction, the best protection is doing the most thorough due diligence possible on every deal,’ says Rick Sharga, executive vice president at Auction.com.” ~ Joel Cone, U.S. News article