Buying Real Estate Notes To Build Wealth

Are you a real estate investor who likes the idea of building wealth? Buying real estate notes might be right for you. 

We invited Paige Panzarello, CEO of Cashflow Chick, to share her expertise about building wealth with notes when inventory is low, and property prices are too high for any good deals. 

Panzarello draws on her 20 years of experience and $150 million in real estate transactions completed to explain the fundamentals of buying real estate notes and how they generate profit. 

Keep reading to learn more about building wealth by buying real estate notes. 

What Does Buying Real Estate Notes Mean?

To understand what buying real estate notes means, you need to understand what a note is. 

What Are Notes? 

Notes are a promise to pay or a debt instrument. The note's debt can be secured or unsecured: 

  • Secured debts mean there is collateral securing the promise to pay. In real estate, that collateral is the property. 
  • Unsecured debts are a promise to pay without collateral. Examples of this type of debt are credit card debt or auto loans. 

Also, notes can either be performing or non-performing:

  • Performing means that the buyer is paying. 
  • Non-performing means that the debt holder stopped paying.


An advantage of buying real estate notes is that you become the bank

Another advantage is that by not buying hands-off investing--you're not a landlord. Instead, you own the promise to pay, not the property.

What Types Of Notes Should I Buy?

The type of note you buy will depend on your risk tolerance and investing strategy. But, Panzarello prefers to invest in non-performing real estate notes. 

Why Non-Performing Notes? 

Non-performing notes provide good value for a real estate investor. When you buy a non-performing note: 

  • The property is collateral and secures the debt 
  • You must be in the 1st position (you get paid first) 
  •  There is a deep discount based on securing collateral

How Do You Find Deals Buying Real Estate Notes? 

Building a network is the best way to find deals for buying real estate notes. 

Through your network, you may find deals buying real estate notes from the following: 

  • Conferences
  • Personal relationships
  • Social media

How Do You Make Money Buying Real Estate Notes?

How do you make money buying real estate notes? Usually, you'll buy the non-performing note at a discount on the unpaid principal balance. 

The following example uses figures for educational and illustrative purposes only. The figures are not a guarantee of performance. 

Here is an example of how you might make money buying real estate notes: 

  • Note's unpaid principal balance: $100,000 
  • Legal balance (fees and taxes): $120,000
  • Current market value of securing collateral (property): $80,000

Since it's non-performing and the person who has the note is not paying anymore, you can buy the note at a discount. 

In this instance, let's suppose that the discounted note price is 50% of the current market value of the property: 

  • Note purchase: $40,000
  • Note workout costs: $5,000

 You are all in for $45,000 but have equity of $35,000. The equity is the home's current market value minus the cost of buying the note: $80,000 CMV - $45,000 note = $35,000.

But how do you tap into that equity? 

The way to make money buying real estate notes is through one of the many flexible exit strategies. 

4 Money-Making Exit Strategies For buying real estate notes


When you invest in notes, you need to be aware of the difference between judicial and nonjudicial foreclosure states.

  • Judicial foreclosure states can take up to 18 months to complete the process.
  • Nonjudicial foreclosure states generally take 6 months to complete the proceedings.

In general, you want to avoid judicial foreclosure states because they take more time and money to foreclose. 

Foreclosure is usually the last resort, but since you're in the first position: 

  • When the house goes through foreclosure, you'll get paid first 
  • The only "work" you did was flipping the note
  • You never have to go to the property or invest sweat equity

Here is an example of how foreclosure may work out. 

  • Foreclose starting at $70,000
  • Sell to a 3rd party
  • The 3rd party gets the house
  • You get $70,000. 
  • You've made $25,000 by merely flipping the note

Short Sale

A short sale usually takes 3-6 months. An example of a short sale looks like this: 

  • Sell the house for current market value: $80,000
  • You've made $35,000 cash from the short sale.

Deed In Lieu Of Foreclosure

This exit strategy generally lasts 3-6 months. You get the property instead of foreclosing, which acts as complete repayment of the loans. 

Once you have taken possession of the house, you can:

  • Sale at REO
  • Fix and flip
  • Short term rental 
  • Buy and hold property

Establish Reperforming Loans

Getting the loan reperforming can take between 6-12 months. You can use $120,000 to work with borrowers to get them reperforming on loan by forgiving some debt to get them performing. It makes sense because you were never going to see that money anyway. 

You might give the borrower a $20,000 discount: 

  • Set a new principal balance of $100,000
  • Determine interest rates 
  • Reset the length of the loan
  • Require a downpayment

You make money by:

  • Refinancing the loan 
  • Earning interest 
  • Receiving mortgage payments as monthly cash flow.

Or, when they become performing notes, you can sell them to a performing note investor. 

Key Takeaways

As with all deals, buying real estate notes requires you to perform due diligence

The fundamentals of buying real estate notes include the following: 

  • Real estate notes are a type of secured debt
  • There is value in non-performing notes
  • Hands-off investing
  • Several exit strategies exist for real estate note investors

Do you want to learn more about real estate investing? Join Royal Investing Group Mentoring, where our expert investor community discusses opportunities and real estate investing best practices.

Last Updated: 
January 25, 2023

Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.

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