How to Invest Effectively in Non-Performing Notes

Buying non-performing notes or loans is an excellent way to invest in real estate. Non-performing loans are the type of loans which the borrower is behind on or has ceased making payments.

Previously, banks would foreclosure on these kinds of loans and sell the property attached to the loan, but banks are currently selling these notes without foreclosing.

Whereas some years ago, banks would have been extremely inclined to foreclose on any non-performing commercial real estate property, they are now opting to sell the note.

Reason? Banks are always in the business of lending money, not only owning and operating real estate. By selling the notes rather than going through the costly and sometimes drawn out procedure of foreclosing, a bank remains out of the chain of title

The bank becomes unaccountable for the environmental conditions of the property and does not have to worry about the time and the expense of other property ownership and management issues.

Add in the effort and cost of marketing the property to all potential buyers after the foreclosure and the several existing properties that are already being carried on their books.

Now you can understand why banks were looking for an alternative to the foreclosures. Note selling has offered that alternative avenue.

For buyers, the primary benefit of buying a non-performing note is clear: great opportunity to get the loan and the underlying property at a steep discount from its initial cost. After buying the note, the buyer has choices: negotiate a new loan with the borrower, or even foreclose on the mortgage itself.

More often than not, the potential buyer—usually an experienced real estate investment firm or a developer who sees a real opportunity to turn the property around—needs to own the site and will eventually foreclose. There is high success for a buyer in this depressed market.

However, buyers be careful! Those looking to buy non-performing notes or loans need to consider the following things:

1. Foreclosure laws of the state

Ensure you know the foreclosure laws in a specific state in which the underlying asset is situated. In some states with its non-judicial foreclosures, the process of foreclosure is straightforward and can be finished very quickly.

On the other hand, in other states, the process can easily drag on for quite some time.

2. Full assessment of the asset

You must determine what proportion of the asset is being leased and, of such leases, what percentage of tenants are really paying their rent regularly.

A high proportion of the property may be leased, but a high fraction of those tenants may also be behind on payments. What are you actually getting for the money?

3. Sufficient enquiry

Try to acquire as much information as possible from the lender concerning the asset before investing your money on due-diligence investigations. The lenders usually have extensive files about every asset—you only need to push them to give you the materials.

4. The condition of the Improvements

The condition of improvements is usually more crucial than other property kinds since the turnover of leases is very frequent (i.e. each year) and potential new residential tenants will just look to an alternative apartment complex if the available property does not “look good.”

5. Obtain an Updated property condition report

If time allows, obtain an updated property condition report prior to buying the note, but possibly obtain such a report before finishing the foreclosure.

The property condition report is essential in determining any required capital improvements, and that amount will be used purposely to find out how aggressive a potential note buyer can be with the rental rates.

Non-Performing Notes

A real estate note is a promissory note on to repay a specified sum of money plus interest on a mortgage loan. Mortgage notes are a good investment opportunities offering them payment over a period of time. They are traded on the secondary market quoted as a percentage figure. When you own a note, you […]

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Making Investments in the Real Estate Industry

Investment is a really hot topic nowadays. People have the money and the temptation to spend it all is just too much. This is why more and more individuals are turning to make investments in whatever they can find easy to invest in. Luckily for the world, investing is one of the easiest things you […]

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Five Reasons Real Estate is a Good Investment Opportunity

Since the end of the Second World War, man has sunk his efforts in an endless effort to secure more money and gain more profitability. This implies that any viable investment opportunity is worth pursuing, putting in mind that fluctuation may chew away the benefits over time. One of the major upcoming investment industries is […]

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Buying Mortgage Notes for Better Investment Returns

With many people depending on the savings account as a pillow for their retirement structure, more and more people are usually left in turmoil. This is for the simple reason that the returns do not come out as planned, thus the dreams dreamt are often shuttered making more people depend more on the social security. […]

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5 Reasons Owners Offer Seller Financing

Why would a seller allow a buyer to make payments over time for the purchase of property? Wouldn’t the seller rather get paid now and require the buyer to obtain a bank loan? Here are 5 reasons property owners offer seller financing: 1. Reduced Marketing Times What is the first thing a real estate agent […]

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Safekeeping the Original Mortgage Note

Can you easily locate the original mortgage note? This important legal document should be kept in a safe place, and here is why! The promissory note is a promise to pay or IOU from the property buyer. It spells out the amount due and terms of repayment. In legal jargon it is known as a […]

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Avoid Three Seller Financing Mistakes

Would you rather have $97,000 to sell your $100,000 note or only $80,000? The difference in usually comes down to the big three. Here’s the three biggest mistakes note sellers make and how to avoid flushing money down the drain. Mistake #1 – Failing to Check Credit The payer’s credit report lets you know how […]

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Seller Financing – How Much Can The Buyer Afford?

Many sellers accept owner financing without any idea of how much the buyer can actually afford to pay. The last thing a seller wants is to stress over receiving monthly payments or worse, getting the property back through foreclosure. 3 Ways to Calculate Payment Affordability Before Accepting Seller Financing The amount a buyer can afford […]

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Seller Financed Notes and Interest Rates

The interest rate a seller agrees to accept when providing owner financing to the buyer has a large impact on the note’s value. Unfortunately, many sellers overlook this important decision. Why Private Mortgage Note Interest Rates Matter Inflation Fighter Each year it seems the cost to buy the basics just keeps going up. It’s not […]

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Accepting payments on the sale of real estate might have made sense at the time, but circumstances change.

Many sellers discover they would now prefer cash today rather than the small amount that trickles in each month.

Here are just a few reasons people have sold all or part of their seller financed mortgage notes for cash:

  • Retirement
  • Taxes
  • Investment Opportunity
  • Expensive Medical Care
  • Vacation
  • College Tuition
  • Unexpected Financial Changes
  • Peace of Mind – no more worrying if the buyer is going to make late payments or having to foreclose
  • Accounting headaches, IRS regulations, paperwork hassles and the list goes on…

The only way to decide what is best for your situation is to know the options available.

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