Learn To Be A Fix & Flip Investor: Investing in Non-Performing Notes: A Win-Win for Borrowers and Investors

Saturday, October 10, 2015

Investing in Non-Performing Notes: A Win-Win for Borrowers and Investors

Investing in notes is a relatively safe investment strategy that pays consistently high interest rates with low risks. While note investing can yield high returns, investing in non-performing notes can have even bigger payouts. However, there are more risks involved in non-performing notes so it is important for investors to be aware of all risks and benefits.

Have you ever heard of investing in notes? Probably not, but you are most likely already doing it. If you have a credit card, car payment, student loan, or mortgage, you are in the note investing business. But, you are on the wrong side of it. You are paying interest on a note to a bank or note holder instead of earning high interest rates by being the bank. When you purchase a note you become the bank and have many of the advantages like high interest rates and security that the bank has. This includes the ability to renegotiate the terms of the note in some cases, earn higher than average interest rates, and have a consistent interest income that is not dependent on market conditions. If this sounds like it is too good to be true, it is not. Note investing is a little known but very legitimate type of investment that money savvy investors and banks take advantage of regularly.

One popular type of note is a real estate note. Real estate notes are generally safe investments because they are backed by actual physical collateral, the property that they represent the title to. Real estate note investing also has an extra opportunity for smart investors to earn high returns, non-performing notes. A non-performing note is exactly what it sounds like, a debt that is currently not being paid. When a mortgage is not being paid, the bank has two options, foreclose on the property or sell the note to an investor. While several years ago foreclosure was the first choice, many banks are now opting to sell non-performing notes. By selling the note rather than going through the expensive and sometimes drawn out process of foreclosing, a bank stays out of the chain of title, doesn’t become liable for the property’s environmental conditions and doesn’t have to worry about ownership issues. The sale of non-performing notes is a cheaper alternative to foreclosure.

Benefits for Investors and Borrowers

As an investor, you can purchase the non-performing note from the bank for a discounted price. Once the note is purchased, the investor goes about rehabbing the note to turn it into a performing note that can greatly increase in price. As the investor you have a couple options when it comes to rehabbing the non-performing note. You can work with the borrower to negotiate different loan terms. This is a good option if you don’t want to own the actual property but you want to earn monthly payments, including interest. It can also work out well for the borrower who can avoid foreclosure and further negative marks on his/her credit.

A second option to rehab a non-performing note is to foreclose on the property. This is a good option if you want to sell the property for a profit or if you are a developer looking for cheap land and buildings for a new project. This is only a good option if you want to own the actual physical property at a discounted price. Many experts advise that this can be a great strategy to get a multi-family or commercial property for much less than the appraised value.

Danger, Buyer Beware!

Like any investment, non-performing notes have some risks associated with the investment. You can help yourself risk less by taking a few critical steps to protect your investment:

· Know the foreclosure laws in the state where you purchase the property. Some states require you to go to court and go through the process of judicial foreclosure with takes longer and can cost more money. If you are getting a great deal it may still be worth it, but it is important to know about all the issues upfront.

· Get as much information about the physical asset as possible. Know the location, market value, condition, and any other pertinent details about the property.

· If possible, get a home inspection and appraisal done prior to purchasing the note, especially if you want to own the actual property. This will help protect your money.

· Find the right lender who knows the ins and outs of the non-performing note business. Not just any bank will do, make sure your financial professional understand note investing and has done it before.