Let’s use a more simplified definition of this type of investment.
A discounted note is nothing more than an IOU. The difference is in the collateral , which is the real estate. The real estate investor is not paying the full amount of “X” for a note with an unpaid balance of “X”. They pay an amount less than that which, you got it, is why the transaction is called a discounted note.
The discounted note price results in an automatic and immediate increase in the value of the investor’s “cash on cash” yield with the investments. In essence, the homeowner is paying 4% (as an example) interest on $50,000, but the investor did not pay $50,000, rather much less. This discounted investments act, if you will, as a sort of “built-in” profit margin.
As an example, let’s use a discounted note that an investor actually paid $35,000 in which to acquire. There is an immediate “capital gains” profit of $15,000. When executed on purpose, years of investing in discounted notes secured by real estate can result in a significant retirement income.