Mortgage Note Investing: Institutional vs. Seller Financed Notes

By Fuquan Bilal

What’s the difference between institutionally originated mortgage notes, and seller financed notes? Which are better for investing in?

Institutionally originated and seller originated mortgage notes can be substantially different from an investment perspective. They have notable differences. Yet, they can both be traded as valuable paper. How are they different? Which should you invest in?

Institutionally Originated Mortgage Notes

These are mortgage loans originated or made by banks and licensed mortgage lenders. They go through a much more systematic and rigorous application, due diligence and review process. It’s not always a perfect process, and investors have to watch out for fraud. Yet, these loans are generally considered more reliable for secondary market buyers. They know the process these loans went through, the due diligence items, and the QC checks in place. These loans are also typically sold in larger pools, giving investors access to better deal flow, a more streamlined acquisition and due diligence process for themselves, and often better discounts based on volume.

Seller Financed Mortgage Notes

Only a very small percentage of homes sold are sold by owner, where most seller financing occurs. The amount of this volume changes over time depending on other finance and real estate trends. We have seen more resurgence in this area recently, due to high home prices, and a lack of desire to do business with main street banks. More individual real estate investors and small businesses are realizing more of the benefits of this strategy too. They are discovering the ability to sell these notes in whole, or partially, to further boost returns and enjoy more liquidity. It can also make homes and commercial real estate faster and easier to sell, while achieving premium prices for them.

However, seller financed generally trade at deeper discounts in the secondary market. But they can be more work for investors. And since they aren’t coming in bulk, they take more work to buy. They also may need more due diligence in acquisition to vet them. Most importantly, many sellers really don’t know what makes a good note. They are primarily thinking about what is going to serve them, and in selling the property. However, there are more who are systemizing their approach, with the secondary market in mind. These loans may also currently be getting made at higher rates than conventional loans.


Both types of mortgage notes can be profitable for investors. As fewer, higher rate institutionally originated loans become available to smaller investors, some may supplement with seller financed notes. However, a careful balance must be struck, and proper awareness of the additional costs and work that may be involved with privately originated loan notes.

Investment Opportunities
Find out more about investing in secured debt and real estate, go to NNG Capital Fund

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