Setting Up Your Note Business

Entity Formation

You need a legal entity to buy mortgage notes. Most sellers won't transact with an individual, and you shouldn't want them to — personal liability exposure on distressed debt is real.

An LLC is the standard structure for note investors. Here's why:

• Liability protection. The LLC creates a legal barrier between your personal assets and the business. If something goes wrong with a loan workout or foreclosure, creditors pursue the LLC, not your personal bank account.
• Pass-through taxation. By default, a single-member LLC is taxed as a sole proprietorship — profits and losses flow through to your personal return. No double taxation like a C-Corp.
• Operational flexibility. You can add members, change management structure, or bring in partners without restructuring. As your portfolio grows, this matters.

State of formation matters less than people think. Form in the state where you live and operate. Wyoming and Nevada get recommended for privacy and fees, but unless you have a specific reason, your home state keeps things simpler — one state filing, one registered agent, fewer complications.

Some investors create a separate LLC to hold assets (notes), keeping the operating entity clean. This is smart but not urgent — you can restructure later. Start with one LLC and don't let entity planning become a reason to delay.

The Operational Checklist

Once your LLC is formed, get these in place:

EIN (Employer Identification Number). Free from the IRS, takes five minutes online. You need this before you can open a bank account, onboard with a servicer, or file taxes. Apply at irs.gov.

Operating agreement. Even for a single-member LLC, have a written operating agreement. It defines how the business operates, how decisions are made, and how profits are distributed. Many states require it, and banks will ask for it when you open your account.

Business bank account. Keep business funds completely separate from personal funds. This protects your liability shield — commingling funds is one of the fastest ways to "pierce the corporate veil" and lose your LLC's protection. Any business checking account works. You don't need a special setup.

E&O insurance (Errors & Omissions). This covers you against claims of professional negligence or mistakes in your note business activities. Not all investors carry it from day one, but it's inexpensive and worth having, especially once you're actively working out loans or brokering deals.

Beyond the Basics: Institutional Seller Requirements

The checklist above gets you operational. But institutional sellers — banks, credit unions, and platforms like FIXnotes — require more before they'll transact with you. Their vetting process exists to protect borrowers and ensure loans are serviced legally after the sale.

Expect to provide:

• Compliance attestations — written commitments to follow FDCPA, FCRA, CFPB guidelines, and state-specific regulations
• Background screening — sellers check CFPB enforcement actions, state AG complaints, litigation history, and sanctions lists
• Servicing arrangement documentation — who services your loans, where (US-based required), and how
• Proof of insurance and financial statements — evidence your business is real and solvent
• Internal compliance policies — your procedures for data protection, quality control, and borrower interactions

This sounds like a lot. It is — but Module 7 walks you through building your complete vetting package step by step. Every document, every attestation, every screening requirement. By the time you finish, you'll have a portable qualification package that institutional sellers recognize and accept.

For now, focus on the four basics: LLC, EIN, bank account, insurance. The rest builds on that foundation.

Servicer Selection

This is one of the most important early decisions: you do not service your own loans.

A licensed loan servicer handles borrower communication, payment collection, escrow management, default notices, and regulatory compliance on your behalf. They ensure every borrower interaction meets federal and state requirements — FDCPA, RESPA, TILA, and state-specific laws.

Why a servicer is non-negotiable:

• Legal compliance. Debt collection is heavily regulated. One wrong move — a phone call at the wrong hour, a missing disclosure, a mishandled payment — can expose you to lawsuits and regulatory action.
• Professionalism. Borrowers respond better to a licensed, established servicer than to an individual investor calling them directly.
• Record-keeping. Servicers maintain the official payment history, correspondence log, and legal record. If you ever need to foreclose, modify, or sell the note, clean servicing records are essential.

Choose a servicer before you buy your first note. Talk to 2–3, understand their fee structure (boarding fees, monthly fees, default management fees), and confirm they service the asset types and states you'll be buying in. Some servicers specialize in non-performing loans; others focus on performing. Make sure yours handles NPLs.

Define Your Buy Box

Your buy box is your set of criteria for what you will — and won't — buy. It focuses your deal sourcing, speeds up tape review, and prevents emotional or impulsive purchases.

Define these parameters upfront:

• States. Some states have 6-month foreclosure timelines; others take 3+ years. Some have borrower-friendly laws that complicate workouts. Start with states you understand or that have investor-friendly legal frameworks.
• Lien position. First liens are lower risk, higher cost. Second liens are cheaper but subordinate — you can get wiped out in a first-lien foreclosure. Most beginners start with firsts.
• UPB range. This determines how much capital you need per deal. $50K–$150K UPB is a common starting range — large enough to be worth the effort, small enough to manage risk.
• Property type. Single-family residential is the bread and butter. Condos, manufactured homes, and vacant land each carry unique risks. Start narrow.
• Performance status. NPL, RPL, or performing. This course focuses on NPLs, but your buy box should state it explicitly.

Your buy box will evolve as you gain experience and data. That's expected. The goal now is to have one — a clear, defensible position that keeps you disciplined.

Funding Basics

You need capital to buy notes. Here are the common sources:

Cash. Simplest. You fund deals from your own savings or business account. No partners, no interest payments, no approval process. The downside: you're limited to what you have.

Self-directed IRA (SDIRA). You can buy mortgage notes inside a self-directed IRA or 401(k). The returns grow tax-deferred (traditional) or tax-free (Roth). The catch: you can't commingle SDIRA funds with personal funds, and there are strict rules about self-dealing.

Private lending. Borrow from individuals — friends, family, professional private lenders — at agreed-upon terms. You pay them a fixed return (say 8–10%), and you keep anything above that. This leverages your deals but adds a repayment obligation.

Joint ventures (JVs). Partner with someone who has capital but not expertise (or vice versa). Structure varies — common splits are 50/50 or a preferred return to the capital partner. JVs let you scale faster, but require clear agreements and trust.

Start with whatever capital source you have access to today. Don't wait until you have the "perfect" funding setup. One deal funded with your own cash teaches you more than six months of researching OPM strategies.

The Most Common Mistake

Over-engineering the setup. Spending weeks on entity structure, months researching servicers, endlessly refining a buy box you've never tested.

Here's what you actually need before your first deal:

1. An LLC with an EIN and bank account
2. A servicer relationship (at minimum, a conversation and a fee schedule)
3. A defined buy box (even a rough one)
4. Capital for one deal

Get those four things in place and start looking at tapes. You'll learn more from reviewing 50 real data tapes than from reading about the business for another month. The setup will evolve as you operate — but you have to start operating.