When dealing with property investment, knowing the terms and how they can affect you is important to successfully navigate your way through this business. Non-performing notes are very popular among real estate investors, and understanding the process of how they can assist in increasing your financial opportunities is key.
What are non-performing notes?
Non-performing notes are loans that either close to defaulting, or are already in a default status, which causes problems for lenders and banks that have clients or businesses who are not meeting their financial obligations.
Another term used for non-performing notes are distressed assets. Any attempts to collect payments have been unsuccessful, and the loan is in arrears with a number of expenses and back payments due.
How does this work?
This loan has interest and principal payments that are more than 90 days late, or interest has been capitalized, refinanced or delayed by agreement for more than 90 days.
With non-performing notes, the maturity date could have passed, but some of the loan is still outstanding.
Essentially, payments are no longer anticipated.
There are millions of non-performing notes all over the world, making the purchase of a non-performing notes very lucrative.
Banks choose to sell the NPN because they can remove themselves from the equation of owning and operating in a real estate capacity. This also removes liability for the condition of the property, and is a better alternative than having multiple foreclosures on the books.
Buyers are also at a huge advantage when purchasing non-performing notes. This is an opportunity to acquire the loan and property at a significantly lower cost. This also opens the door for a few things: the loan can be renegotiated, a new loan can be structured, or the property can be foreclosed.
When investment firms or developers foreclose on a property, they usually end up successfully remarketing the property for tangible gains.
Ways to make a profit on non-performing notes
There are a few ways to profit from non-performing notes, rather than taking the bulk REO approach. Here are a few suggestions:
- Quick Flip: Purchase the property at a discount, improve it and sell quickly.
- Cash for Keys: Purchase the property from the former homeowner who is going through foreclosure. You give them a certain amount of money, they sign the Deed in Lieu. You will avoid any fees attached to the property and the homeowner avoids having a foreclosure on their record. You can then either sell or rent the property.
- Reduce the Principle Balance: Negotiate with the homeowner to pay the non-performing note, writing a new and more reasonable mortgage for the homeowner. Once you have a record of timely payments, you can resell the note to an investor.
What should you know about purchasing non-performing notes?
- You must know the foreclosure laws in the state where the non-performing notes are located. Every state has different regulations which can either expedite or stall the process for a certain period of time.
- Do your due-diligence. Make sure you have as much information as you can gather from the lender, then proceed with your other information gathering protocols. The lender holding the non-performing note has extensive information on the property you are interested in. Getting them to provide that information is key.
- Research how you can find the original note to see what amendments and assignments are attached to the loan.
- Make sure you get a current report specifying the condition of the property if you can. Before you take the steps to complete a foreclosure, you should have a report so there will be no surprises and you can determine what capital improvements are needed, and how you will restructure your rates.
- Know what percentage of the property is already leased, and how much debt you will be taking on from the onset.
How to purchase non-performing notes
- Review the current documents to verify the outstanding balance and repayment terms.
- Verify the date of how long the interest is paid through with the seller of the note.
- Verify when the next payment is due.
- Make sure the note is an insurable first lien position loan (if it is a 1st lien). Know the status of the property taxes, and find out if there are any escrow funds that are being held that can be transferred to you upon the sale of the property.
- Get a report to accurately confirm the value of the property of the note.
- Get the deed assigned to you or your firm.
- Get the original promissory note endorsed to you or your firm, and get the physical note in hand.
- Send note transfer letters to appropriate parties.
Making sure you obtain advice from your attorney prior to making any moves on a non-performing notes or loans is good business sense and will protect your interests.
Understanding the process of REO and non-performing notes can be a lucrative and rewarding investment practice.