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.

Dennis Dahlberg
Broker/RI/CEO/MLO

Level 4 Funding LLC
Arizona Tel:  (623) 582-4444 
Texas Tel:     (512) 516-1177 
dennis@level4funding.com
www.Level4Funding.com

NMLS 1057378 | AZMB 0923961 | MLO 1057378
23335 N 18th Drive Suite 120
Phoenix AZ 85027

How to "Be the Bank" by Investing in Notes

 Note investing is a little know investment strategy that can provide high returns and low risk. You can get started investing in notes by learning the basics of the investment strategy and finding a private lender who specializes in alternative investment strategies.

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.

If you want to get started in note investing, it is important that you learn the basics about the types of notes you can purchase and what your role as the investor is. Note investing has a number of advantages, but perhaps the most appealing is that it creates passive cash flow. This means that you don’t have to do anything to earn the money beyond your initial time commitment to obtain the investment. The capital you invest then begins to work for you, earning you interest each month without requiring time or additional money.

One popular way to start investing in notes is to invest in real estate notes. In this situation you basically buy a promissory note that is part of a mortgage. You hold the note and earn interest. You receive payments each month until the mortgage is paid in full and then you get back your initial investment. You don’t have to work for your payments, you sit back and let the cash flow in.

Benefits of Investing in Notes

Passive cash flow, as mentioned above, is probably the most appealing benefit to most investors who engage in note investing. It is truly a way to let you money work for you, rather than you working for your money which is often the case. In addition, investing in notes is a relatively safe investment because the note you invest in has a fixed interest rate. If you sign on for a 5% note, the rate is always 5%. It is exempt from market fluctuations and you will not lose money if some catastrophe occurs to close the Chinese stock market, or of Wall Street crashes. Your interest is fixed and you can earn high percentages. Think about the interest you pay on your credit card every month. If you own the note, you get paid that instead of paying it to Visa.

Aside from consistent cash flow that you don’t have to work for and high interest rates, note investing is also an easier investment that can be cashed out quickly, if need be. Think about real estate, if you own an investment property you have to maintain it and if you want to sell it, it can take months or even years to find the right buyer. If you own the note on an investment property, you have absolutely no maintenance and a note is easier to sell than a physical piece of property.

Investing in notes is also a versatile investment strategy. You can flip a note like in the case of a non-performing note that is sold as performing, you can rehab a note by working out a loan modification if a borrower is struggling to make payments, or you can even borrow against a note and use it as collateral. Each type of note investing has various advantages that can help you make your money work for you.

Like any investment, there are also risks involved in note investing.

You can help minimize these risks by working with a private lender who specializes in alternative investment strategies. Here at Level 4 Funding we work investors to reap the benefits of note investing while helping to mitigate the risks involved. Call us today to have all your note investing questions answered.

Dennis Dahlberg
Broker/RI/CEO/MLO

Level 4 Funding LLC
Arizona Tel:  (623) 582-4444 
Texas Tel:     (512) 516-1177 
dennis@level4funding.com
www.Level4Funding.com

NMLS 1057378 | AZMB 0923961 | MLO 1057378
23335 N 18th Drive Suite 120
Phoenix AZ 85027