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When your investor funds a note purchase, the note payor has not yet been instructed to send payments to them, so their next payment due will likely be sent to the note seller. Many note sellers cash the payor's 

check and let the investor call the payor to collect on what the investor presumed to be a delinquent payment. This sometimes results in a difficult process of collection from the note seller, who owes the investor that payment (since he sold the note).

To prevent that scenario, an investor utilizes the holdback. A holdback is one or more payments deducted or “held back” from the note broker’s or note seller’s proceeds at closing. When the investor learns that the note seller received the payment, the investor simply confirms that information with the seller and applies the holdback to the note seller's account. If the payor receives the investor’s letter of introduction in time to send their payment directly to the investor, the investor should immediately refund the holdback to the seller or broker, whichever the case may be.

Keep in mind, as the broker it is in your best interest to negotiate the holdback deduction from note seller proceeds whenever possible to simplify the transaction for yourself. On the rare occasion that the seller refuses, the holdback will be deducted from your commission.

The risk, of course, is that the seller knows something the investor does not: if the note payor isn’t performing, the note seller can’t rely on getting the holdback refunded. While their reluctance is of some concern, that doesn’t keep the investor from purchasing the note.

In addition, you may risk losing the holdback should you elect to deduct it from your commission. In this scenario, if the payor makes the payment to the note seller directly, you, the broker, will need to collect
the payment from the seller. The investor is not responsible for collecting on your behalf.

If the investor does not receive the payment within a certain period of time, default occurs, and the holdback is forfeited to the investor.

You can help the buying process immensely by discussing the holdback issue with the note seller at the same time you decide who will pay closing costs, so it doesn’t come as a surprise at the end and harm the
deal. Be diplomatic, however, and avoid the subject of delinquency — a potentially hot topic that may offend the seller — by focusing on the logical question of where the buyer will most likely send the first payment.