There are certain well known and definable risks associated with note buying. You should make sure that you mitigate or eliminate those risks before your ever consider buying a note.

One of the riskiest things you could do is to buy a second or third position non-performing note. In this case the holder of the first position note will almost certainly foreclose and recover some or most of the first loan amount. You on the other hand will be in a weak position and will probably get nothing. To avoid this risk, don’t buy second position notes! You can also choose to invest only in notes that are performing, that is, the payments are being made on time. Yes, the banks do sell performing notes at an extreme discount when they need the cash and when the balloon payment comes due.

One of the biggest risks for a note investor is the risk that the borrower will declare bankruptcy and you will get nothing. What can you do to avoid this risk? The best way to limit most risks when investing in notes is to know as much as possible about the borrower and the asset.

What do the borrower’s financials look like? What personal assets does he have? What is his payment history? Is there any chance that he will file for bankruptcy? Finding the answers to all of these questions is called due diligence. Doing proper and complete due diligence is what takes the risk out of investing. As a note investor all of this information is available to you. It is provided by the financial institution you are buying the note from. To quote Robert Kiyosaki- Investing is only risky when you don’t know what you are doing.

There is a huge learning curve involved when it comes to buying notes. You may have noticed that there is a lot of material being sold on the internet that claims to teach you how to make a ton of easy money in the note buying business. The truth is that you could easily spend a lot of time and money on courses, software and books and still never figure out how to make a dime buying a note.

Another way to approach note buying is to align yourself with a strong team of professionals who have years of experience in the note business and know how to avoid the risks and reap the rewards. You will need good attorneys and people who have personal contacts at the FDIC. These people can guide you through the process and make sure that you pay less for a note than you would if you tried to buy it on your own. They simply know how to play the game at a very high level. If you plan to buy large notes and acquire multi-million dollar assets, you really do need a professional team to work with.