Somebody offered me a note. I don't understand what I'd own.

I looked hard at this same thing for the income reason, so on your first question. You pay 30,400 today and you get 321 a month for 168 months. Add those payments up and it's about 53,900 of cash coming back. The rate that makes 321 a month for 168 months worth exactly 30,400 today is a bit over 9% a year. It's higher than the 6% coupon because the borrower's payments are calculated on 38,000 and you only paid 30,400 for that stream.

On your third question, no, this is the part that surprised me. If they pay off next year you get the full 38,000 payoff even though you paid 30,400. That's a fast profit on paper and then you're sitting in cash again with nothing to buy. People call it prepayment risk. On a discount note it isn't a disaster, it just wrecks the 14 years of income you thought you'd bought.

Question two has a clean answer. You hire a licensed loan servicer. They collect the payment, handle the borrower communication, send you the money and produce the year-end statements. Cost is usually a flat monthly fee per loan plus setup, and on a 321 payment that fee is not nothing as a percentage, so ask for the actual number before you price the deal. Servicer licensing requirements differ by state, which is one of the reasons you use a company rather than a shoebox and a spreadsheet.

Don't buy off a payment history the seller typed up. Ask for the history straight from whoever is servicing it now, plus the note itself, the recorded mortgage or deed of trust, and proof the property taxes and hazard insurance are current. If taxes aren't escrowed into that 321, the borrower is supposed to be paying them separately and you want to see from the county that they actually have been. Unpaid taxes can end up ahead of your lien, and how fast that becomes a real problem depends on the state.

Four years of clean payments and a 38,000 balance on a 92,000 house is a decent shape. The paperwork is where the surprises live.

One more. Ask him why he's selling. A 41% ITV note with four years of history paying 9% to a buyer is the kind of thing people usually keep. There may be a fine answer, he needs cash for a rehab or he's exiting notes entirely. There may not be. Either way you learn something from how quickly he answers.