Non-performing notes on sale can produce great returns, solid cash flow, and the timing is perfect for netting a large windfall of equity over the next few years.
But that doesn’t make every distressed property note a bargain.
Buying notes from banks is becoming increasingly popular and does have many advantages in the current market, not to mention it’s really the only hope for many to reap the returns they really need. That said, many of the non-performing notes for sale today are not being bought wisely.
HUD’s $1.7 Billion Portfolio of Non-Performing Notes for Sale at Auction
DebtX facilitated the auction of a portfolio of 9,000+ non-performing FHA loans last month. These ailing, non-performing assets banks have created may have excited those who have masses of backed up capital they are desperate to deploy. However, they also represent some of the worst performing loans in the market in many of the worst areas that HUD obviously has been unable to sell through other means, most likely even offering them to first-time home buyers and smaller investors through its current system. That’s the bottom of the barrel and while those who can afford to hold them for a decade could see profit there are going to be big expenses in the meantime.
Citigroup’s Adventure into Rentals
Citigroup has also recently entered into the game of creating rentals by offering homeowners leases in exchange for their deeds. While the expectation is that these REOs going up for sale may be more appealing and easier to unload, hopefully propping up property values and income in the meantime, they are unlikely to be the magical investment vehicle they are made out to be and will come with massive liability and occupants who will do anything not to be evicted from “their” homes.
Select Your Investments Wisely
Many of the problems large funds are about to encounter when acquiring bulk packages of REO and non-performing notes include simply not knowing what they are buying or how much it will really be worth, as well as not being prepared for the complexities of rehabbing and property management.
Investing in volume has its appeal, but the blindfolded pin the tail on the donkey strategy is just a little too reminiscent of the flaws that cracked the last housing boom.