The Complete Guide to Finding and Buying Non Performing Notes

Learn where to find the best non-performing notes and how to buy them in our complete guide to non-performing note investing.

What is a Non-Performing Note?

A non-performing note is a loan in default. This status means the borrower hasn’t maintained original payment terms for over 90 days, and the lender doesn’t expect repayment.

Why Buy Non-Performing Notes?

You buy non-performing notes typically for one of two reasons (or both).

The Discount

Investors buy non-performing loans because they typically sell at a discount off the Unpaid Principal Balance (UPB), which is an even steeper discount if you intend to own the asset. The UPB is the amount of original principal that is still due to the lender. This value does not include things like default interest, penalties, and fees.

 
why buy non-performing notes

To Control the Asset

Investors also buy non-performing notes for control of the underlying assets. When you buy a note that’s in default, you assume all of the lender’s powers, rights, and responsibilities. When a note is no longer performing, lenders have the right to collect. This status means different things, depending on the note’s nature.

What are the Risks of Investing in Non-Performing Notes?

Buying notes isn’t risk-free. However, note investing is desirable because the property secures the lender’s position. Here’s an example of how capital stack works to illustrate what’s at stake.

non-performing notes risk

The property owner enjoys appreciation benefits, but the lender enjoys all the security.

If you own the debt position just above taxes, you’re more secure. Let’s look at some math on a fictitious deal (we’ll keep it simple).

sample note deal
Not an actual deal

John Borrower put down 20% to buy a $250,000 home and took out one first-position loan for the remaining $200,000.

Purchase Price$250,000
Down Payment$50,000
Original Loan Amount$200,000
Interest Rate4%
 

John has paid on his home for three years but then loses his job and hasn’t made payments for the last six months.

Unpaid Principal Balance$189,321.21
Arrears (6 Months of Missed Payments)$11,457.96
Fees (Attorney, etc.)$1,124

Now you have an opportunity to buy this non-performing note for, let’s say, 67 cents, or 67% of the current UPB. If you take possession of the property, you’ll be responsible for its taxes and deferred maintenance costs.

Price (expressed as cents on the dollar).67
Purchase Price$126,845.21
Deferred Maintenance$15,600
Back Taxes$1,235
Total Purchase + Liabilities$143,680.21

So now you’ll own this property’s first position lien. Figure in the repair (deferred maintenance) costs and tax debt, and the purchase price is $143,680.21.

If you can’t work something out with the owner, you can also expect about $2,500 in property foreclosure costs. Now, for $146,180.21, you own the property that John bought three years ago for $250,000.

What Could Go Wrong?

If the market shifts and prices drop by 20%, the borrower’s equity is wiped out.

But what if it gets worse?

John gets crazy and takes the copper, which costs another $14,000. Or, the title has issues. There’s another $1,100.

Can You Recover?

After market correction and unexpected expenses, you’re still $41,220 ahead. When you bought the note for 67 cents, you gained the borrower’s equity. You’re actually only in it for about 59 cents. This equity buffer offset some of the added costs.

Market Corrected Price$200,000
Note Purchase Price$126,845.21
Total New Costs and Liabilities$31,935
All-In Worst Case$158,780
Profit$41,220

If you opt to sell the property, plan to deduct realtor fees from your profit. In this example, you’ll make $24,520, or more than a 15% Return on Investment (ROI) on your non-performing note.

Sale Price$195,000
Realtor Fees$11,700
Net Proceeds$183,300
All-In Worst Case$158,780
Total Return$24,520

Is Investing in Non-Performing Notes Risky?

Investing in non-performing notes is probably less risky than investing in the stock market or even leveraged real estate.

However, you should treat each deal with care and caution, educate yourself about the risks and proper due-diligence processes, and seek professional legal or investment advice if needed.

Where to Buy Non-Performing Notes

where to buy non-performing notes

When you search for non-performing notes for sale, consider:

  1. The types of non-performing notes
  2. The volume of non-performing notes you’re buying
  3. How you’ll find and fund your non-performing note purchases
  4. Whether you’ll broker, flip, or wholesale non-performing notes

Where to Find Non-Performing Notes for Sale

Finding note deals is the most valuablehighest-paid activity in the business. It’s low-risk since it requires less capital, yet it offers the highest ROI in the industry.

Whoever Controls the Seller Controls the Deal

The old saying rings true in note buying. You can’t flip, broker, or wholesale non-performing notes successfully if you’re in a broker chain because you don’t control the seller. You can try, but you probably won’t succeed.

Maybe you can find one note and then convince an unsuspecting person to pay you a margin on top of what it cost you. However, that “sale” type is not a business model. Your buyer could lose money, and your reputation will suffer.

DON’T GET INTO BROKER CHAINS AND PRETEND YOU’RE DIRECT

Becoming an extra middleman, or in industry-speak, a “joker-broker,” makes you look silly. Any investor worth working with will notice right away.

YOU MUST BE DIRECT TO THE SELLER TO FLIP, BROKER, OR WHOLESALE NOTES

You must have your own source of non-performing note deals if you’re going to flip notes, broker them, or wholesale them.

But, let’s stop talking about where you can’t buy notes and start talking about where you can buy notes.

Non-Performing Notes for Sale – 8 Sources

1. Big Banks

Big banks are defined as the top 10-15 banks. They sell high volumes of non-performing notes (and REO). When buying non-performing notes or NPNs from the big banks:

  • Don’t expect them to sell you a single non-performing residential note. Some gurus out there will tell you to find a distressed homeowner and have them introduce you to their bank. I’ve NEVER heard even one first-hand account of this method working with a big bank.
  • Some of the largish banks do have trading desks where regular investors can buy notes. You simply have to speak with the right person and get approved.
  • I have seen success with buying one-off non-performing commercial notes from big banks.
  • Banks don’t usually advertise non-performing notes for sale. But that doesn’t mean they aren’t available. Check out our How to Buy Notes from Banks guide to learn more.

Source Summary:

  • Note Types: Various kinds of non-performing notes
  • Note Volume: Only large volumes, but rarely small-balance commercial
  • Pro Tip: Big bank loan sale advisories are done with big-name brokers and aren’t suitable for unproven brokers or investors.

2. Regional and Community Banks

Regional and community banks are excellent sources for buying non-performing notes. As an auctioneer and broker, these banks were my “bread and butter” for note, REO, and foreclosure sales.

When working with the smaller banks, consider:

  • A small sale will impact their books.
  • You can easily speak with a real person who can make decisions.
  • They tend to do their own loan workouts instead of farming it out to a special servicer.
  • They are repeat, non-emotional sellers of non-performing notes and REO.
  • A few small banks can make up a full-time book of business.

Where To Start

  • Determine which banks are sellers and which aren’t.
  • Find out what they have on their books.
  • Establish who handles non-performing note-selling.
  • Learn the best way to approach lenders selling notes.

Each quarter, banks report a lot of information about their late and non-performing notes and “health” and “sell” indicators. With this information, you can determine which lenders to pursue.

Source Summary:

  • Note Type: All types of non-performing notes.
  • Note Volume: Ranges from individual notes to pools.
  • Pro Tip: Brokers and investors should work with 5-10 regional and community banks.

3. Credit Unions

Most of the nearly 7,000 U.S. credit unions have non-performing assets that they’ll sell. Working with credit unions is very similar to working with banks with a few differences.

  • Credit unions are sensitive about their reputation, as they often serve small(ish) communities.
  • Most credit unions are small, so they don’t have a ton of assets. They care about the assets they have, though.
  • Top officers are usually easy to reach.

Source Summary:

  • Note Type: Various kinds of non-performing notes, but most are residential.
  • Note Volume: Ranges from individual notes to pools.
  • Pro Tip: Credit unions are regulated by the NCUA rather than the FDIC, so their standards may be different.

4. Special Servicers

A servicer handles loan or pool administration for loan owners. Servicers frequently deal with selling non-performing notes and handle the collection, workout, and sometimes disposition of problem loans and REO sales.

Special servicers’ methods vary. Some servicers sell “retail” individual assets, some sell pools, and some do both.

Source Summary:

  • Note Type: A range, though some servicers specialize in one property or loan type
  • Note Volume: Range from “retail” one-offs to pools.
  • Pro Tip: Investors should choose servicers that align with their business models.

5. Hedge Funds and Private Equity Funds

Hedge (and private equity) funds buy large pools of non-performing notes from large banks and other high volume sellers. Hedge funds use a few “exits” or sell-off methods:

  • Foreclose and then sell the asset REO or rent it.
  • Make loan modifications to re-establish regular payment schedules with borrowers.
  • By purchasing a large pool, retaining a portion of it, and then selling the rest to smaller investors.

Hedge funds buy much larger pools than most individual investors. A fund often slices the pool and finds ways to make a return on different loan sets.

Funds usually use specific investment turnaround time frames. Once an investment runs its course, the fund manager may try to clear the remaining assets and move on.

Hedge funds don’t use the same public reporting methods as banks and credit unions, so do a little homework before pursuing this seller type.

Source Summary:

  • Note Type: Funds tend to be specialized, typically in either commercial or residential notes.
  • Note Volume: Larger funds sell larger volumes, and sometimes, smaller funds even sell individual assets.
  • Pro Tip: Hedge funds can be a good source for small and individual investors. However, beware of the “joker-brokers” sometimes associated with smaller funds.

6. Note Brokers and Loan Sale Advisors

A few big non-performing debt intermediaries like First Financial and a long list of smaller independent market players offer non-performing notes for sale. When working with these companies, watch for false brokers. Some clues you’ve encountered one:

  • No business email address
  • Communicates primarily on social media platforms like LinkedIn
  • Says their buyer needs to buy 100s of millions of dollars of product a month
  • “Broker” can’t divulge seller details or answer questions about tape assets

Source Summary:

  • Note Type: All
  • Note Volume: Ranges from one-offs to large pools.
  • Pro Tip: Can a broker broker notes another broker is brokering? Mostly no. Brokers and loan sale advisors are great for investors, not other brokers.

7. FDIC Loan Sales

The FDIC sells non-performing notes through a few loan sale advisors. Buyers require FDIC approval. Learn more about the buying process here.

Source Summary:

  • Note Type: All types of loans and other assets
  • Note Volume: Sales range from 1 to 100s of notes
  • Pro Tip: FDIC note sales are for investors. Broker participation isn’t offered beyond the approved loan sale advisors. If you can get on the list of approved buyers, DO IT.

8. Loan Sales Marketplaces

Marketplaces vary. Good sources are out there, but really, most benefit the seller.

Paperstac is a user-friendly marketplace that hosts non-performing note listings. It provides extensive information, and a real “note guy” built it. (I’ve interviewed him, he’s real.) His expertise shows in the marketplace’s design; all of the transactional steps and processes that you need are built right in.

Source Summary:

  • Note Type: Most
  • Note Volume: Broad
  • Pro Tip: When you bring a deal to a marketplace setting, the sale usually adjusts to a true market price. This correction is in stark contrast to the “off-market” deals you’ll find when working directly with lenders and services.

Non-Performing Note Investing Strategies

Rehab non-performing or sub-performing commercial notes.

One of my clients buys small-balance non-performing commercial real estate notes with owner-occupied properties. Workout officers then work to get them re-performing through modifications and (rarely) forgiveness. When it’s not possible to get the assets re-performing, they foreclose.

Workout non-performing junior residential liens. Investors can buy non-performing junior liens by offering some principal forgiveness to the debtor, modifying the terms, assisting with refinancing.

Use government programs for rehabbing or paying off residential notes.

My friend uses these strategies for his first-position, or senior, residential non-performing note buyers. They can be used on Hardest Hit Funds and other government-backed refinancing programs.

“Loan to own” on non-performing commercial notes.

Commercial note investors who want to own and control the collateral find that buying mortgage notes from the bank is often the best strategy. This note-buying-to-property-owning strategy is successful with retail strips, office parks, and construction projects.

“Flip” residential notes.

My friend Mike Ruscica, a full-time note investor in non-performing junior liens, uses an assignable contract approach to flipping notes.

“Flip” re-performing notes.

You can buy non-performing notes from banks, get them re-performing, then sell the newly performing cash flow note to an investor. If you want to go to the next level, sell part of that note to another investor (a partial). This way, you’ll have an income stream until the debt is extinguished. My friend JD calls this a “soft flip.“

Buy unwanted, special-purpose non-performing commercial notes.

Banks generally don’t want to get into a “chain of title” on a potentially “dirty” piece of real estate. It’s more advantageous for the bank to sell the note.

We had one transaction with a specialty investor where we sold the gas station at the foreclosure auction within 60 days of the investor taking note ownership. The investor made a quick $300,000 without ever getting into the chain of title. How? He’s got a note-buying strategy. He knows his collateral, works with the borrower, and focuses on assets and areas he truly knows.

How to Value Non-Performing Notes

Non-performing loan values depend on a few variables, including the note, collateral, and borrower details and how the purchase relates to your specific investing strategy.

My friend and advisor Pat Blount put together the Loan Acquisition Suitability Evaluation and Rating (LASER) system to determine a note’s value based on buyers’ unique needs and strategies.

Note Valuation Factors

  • The Note
    • UPB figure
    • Interest rate and default interest
    • Property covenants
    • Existing liens and their priorities
  • The Collateral
    • Estimated property value
    • Location
    • Local market conditions
  • The Borrower
    • Property use (residential, commercial, industrial, special, etc.)
    • Borrower background to determine payment collection or re-performing note potential

Other Ways to Determine Non-Performing Note Value

You can also perform market checks to see what active participants are paying for which types of loans. The FDIC lists the strike prices for their pools of assets. Consider joining LinkedIn’s bank direct group to discuss the matter with your peers.

Start Investing In Non-Performing Notes

Investing in non-performing notes can take many forms. To get started, educate yourself on the “lay of the land” before you start putting your money at risk.

Here’s a roadmap to the most rapid and secure returns for new note investors:

  1. Start sourcing notes for other investors. Note-sourcing is the fastest, most profitable way to start investing in notes without capital. You can start with a phone and a laptop. 
  2. Develop your list. Maintain a database of buyers, sellers, investors. You will never, never regret doing this.
  3. Learn due-diligence. This process explores whether a note is a good deal, and when executed correctly, will instantly increase a transaction’s value.
  4. Learn how to buy notes with no money. Once you’re good at sourcing deals, you’ll run out of cash.
  5. Build systems so your whole business runs without you. Once you know how to find, fund, and flip your deals, you can automate your business and enjoy the rewards.

Take the guesswork out of the note-buying process with BankProspector. Our innovative software program streamlines and simplifies the most challenging aspects of note investing. Our users have access to a growing list of servicers, bank contacts, and BPO and REO asset management companies.

Buying notes is an excellent way to build your investment portfolio, and our note experts are here to help. Join a free webinar or our Academy to delve into industry insights. When it’s time to boost your note investments, it’s time for DistressedPro.

37 thoughts on “The Complete Guide to Finding and Buying Non Performing Notes”

  1. thanks for your overview of the note buying situation, maybe it is hidden there someplace, however i am not sure you answer the question. Re-selling non- performing notes individually per se. be that as it may, i am still planning to join your company , great info. as usual.

  2. Hello , I also wish to refer to any types of Lenders who is interested in buying commercial loan of about eight to ten million usd . I have clients of commercoial real estate .

  3. As a licensed NYS real estate agent I want to learn more about brokering commercial non performing mortgages to present to my value commercial investors. How can I start?

  4. Hi Bret,,,what is the standard commission per note that note brokers charge, that you have encountered along the road? Is it a standard 3% with a Minimum to charge per note? and the highest?

  5. Very ! Very!! Very!!! impressed with your general and specific answers on mortgage notes. I am new in this line of business. Funding notes sources is my main focus and interest. I know abot usenotes but I need more options that specialized in mortgage note funding. I can buy and flip daily. I have some notes that I’m looking at now in the auction platforms. If you have a list source I will appreciate this information. Thanks

  6. Do you source non-performing Student Loans? I’d like to explore acquiring some for collection attorney work… Any insight into a good source would be appreciated….

    • Hi John,

      Banks don’t show this category as reported so we unfortunately do not in our software. We show information for commercial, residential, construction, multifamily, farmland, C&I (non real estate business debt), and credit card debt.

  7. how do I value the Note for sale by the bank? I was told to make an offer for a certain NPL. The business is runned by a management company hired by the bank. MY interest is in the property itself. I have the chance to buy the notes before the whole foreclosure process. The current owner hasnt been paying the loan for some time now. So now I have the chance to get the notes at a great price and soon be the new owner of the property and business. What would I offer for a loan that was given for up to $5,000,000. the notes way more then what the property is worth.

    • There isn’t a blanket answer that can be given to the questions “what should I pay”. In fact we have a whole webinar about exactly this question, why it cannot be answered, and how to ask the right question.

      However the short answer is that you should only pay as much as you have to in order for you to achieve the desired return. It doesn’t matter if the loan is $100,000,000 – what is the collateral, what is it worth and what is your plan for achieving a return are the questions you need to answer.

  8. I was just on the webinar, was NOT able to download the file, please send the file so I have time to review. also
    In the State of Florida do I have to be or have any license to lend money for notes or buy the notes, .

    The Real question is Do i have to be licensed in the State of Florida to be a private lender??

    thanks

    troy
    407-466-7335
    [email protected]

    • You can make a request in the chat and we can help you there with the file. As far as state to state licensing on originating loans that’s not something we have info on for you here. You do not need a license to buy or broker notes in any states that we’re aware of with the possible exception of California with regards to privately held notes.

  9. Brecht,
    I owe my gas supplier (family owned gas station in Washington State) a good amount of money and have setup a weekly payment plan. during the repayment period I advised them I stopped paying the mortgage. Over a period of time they would call and ask how many months I was behind in that mortgage. It was decided that they would contact the bank and attempt to purchase the non-conforming note, thus, we could set up terms to repay mortgage and the money we owe them for the outstanding fuel invoices.

    During their talks with the lender they approached me with written terms on the note and how it would be repaid once they acquired the note from the bank. During negotiations of the terms between us( Interest rate , term length etc…) the gas supplier served us notice that they had acquired the non-conforming note from the bank and ordered us to vacate. now what?

    Sincerely , Ann A.

    • Hey Ann,

      I’m not providing legal or accounting advice in any way but I’ll relay to you what I know from experience and from this brief description of the problem.

      If you’re in default on the note the owner of the note can use their power of foreclosure to collect. Since I don’t know anything about the note or the state that you’re in I will say only this. If they have not foreclosed then they probably do not have the right to evict you unless there are some “bad boy” clauses and remedies in the note that would provide them that remedy and power. I have seen friendly foreclosures where the tenant leaves or cooperates pre-foreclosure but I have not seen an adversarial situation where the lender is able to forcibly remove the owner until that lender has foreclosed.

      You should seek legal counsel if you have not already.

      The most common way to put off a foreclosure and buy yourself more time in a situation like this where you’ve got a non-performing commercial note (meaning you’re in default and they have the power to foreclose) is to file a chapter 11 bankruptcy.

      If there is no chance that there is any equity in the property for you after all the debt then this may just be a waste of time and money for you.

      One strategy for a situation like this if there is little or no equity and you’re mentally ready to walk away is to negotiate hard with lender for a “cash for keys”. Example: “Give us $XX,XXX and we’ll do a deed-in-lieu, otherwise we’re going to file bankruptcy, its going to be expensive for you (the lender) its going to take a long time and we’re not going to make it easy”

      Sorry to hear that you’re faced with this and best of luck.

      Remember, none of this is qualified legal or accounting advice and you should always seek consultation with your own trusted professionals before you make any decisions in this or related matters.

  10. tons of information here. i have found it difficult to get any information worthwhile from these folks from linkedin. they all seem to want to stay hushed about what they know. i need a good resource, but i think you have hit on exactly what i have thought all along. the smaller banks and credit unions, is the best approach.

    thank you for your insight, and if you have notes for sale i have buyers.

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