What Are Private Mortgage Notes?

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  • Written By: Justin Riche
  • Edited By: A. Joseph
  • Last Modified Date: 19 August 2019
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Private mortgage notes are loans created in certain cases where real estate properties are sold privately. In transactions involving private mortgage notes, the buyer gets the property from the seller or owner under a conditional loan structure agreed upon by both parties. The parties involved will sign a contract, which is basically the note and which also serves as evidence that the parties have a particular business agreement. Typically, in this arrangement, the buyer agrees to make a regular payment to the seller until the loan is paid off. After completing this deal, however, the private mortgage note holder might choose to sell the note to a third party entirely or partially.

There are various reasons why people create these notes, and one of them is to get the sale of a real estate property closed fast, because institutional loans can be time consuming and/or hard to get, in some cases. For example, commercial banks, pension funds or insurance companies might have strict criteria for extending mortgage loans. Many people might not meet the criteria set by these organizations, which might reduce the market for certain properties. When an owner desires to sell his or her property and is willing to assume some risk, then he or she can use the private mortgage notes option.


In order for the property to be transferred from the seller to the buyer, both parties agree on specific terms and normally draw up and sign a loan contract. The terms of the contract might state issues such as the amount of interest to be paid, the regular payment rate and whether it is weekly, biweekly or monthly. Other issues also will be addressed, such as what actions will be taken by the seller if the buyer stops making regular payments or simply is unable to meet any future payments. When a buyer defaults on payments, the holder of the private mortgage notes normally can seize the property and might choose to sell it to somebody else.

Private mortgage notes also can be sold to other investors. There are many reasons why a holder of a private mortgage note might choose to sell it to a third party. One reason is that private mortgage notes usually provide a regular stream of income, but the holder might want to get a lump sum of money urgently to satisfy an immediate need. When he or she sells the note, the new note holder will receive the regular payments. These deals also can be negotiated and customized to create a mutually beneficial business arrangement.

There are investors and businesses that specialize in the buying and selling of private mortgages notes. Before buying the note from the current holder, an investor usually will assess any potential risk associated with the note. He or she also will appraise the value of the property backing the note and other factors, such as the financial status of the mortgage payer. Private mortgage notes might be referred to as owner carry-back notes, cash flow notes, owner-financed notes or seller-financed notes.


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