Non-performing note investing is not for the faint at heart. In fact, many note investors get excited about the prospect of buying non-performing notes at pennies on the dollar and they can only think of the upside potential of the note purchase. What really needs to be done is to consider the worst case scenario of being a non-performing note investor and hoping for the best, but planning for the worst.
Here are a few things to consider if you are going to be a non-performing note investor.
Buy a performing note first: This might sound trivial when in fact it is a sound practice. Performing note investments will give the novice note investor a good understanding of what is involved in note investing, and prepare a note investor for the dangerous waters of non-performing notes.
Be prepared for a foreclosure: While the dollar amount between states varies, remember you are buying a “toxic” asset that the bank has priced so aggressively to get rid of it because they know the upcoming legwork and cost associated with getting the underlying asset, the house, back into performing condition. Consider this: If a bank sold you a note at 20 cents on the dollar, and you were hoping to gain quick possession of the asset would you be prepared for a 6-18 month delay in getting clear title? Would you be prepared for $50,000 of legal fees? These are not made up numbers and timeframes. These are actual pitfalls that a non-performing note investor has to consider.
Get as much information upfront as possible: If you are preparing to purchase a non-performing note you need to get as much documentation as you can to accurately evaluate the deal. Important documents like the original note, all related amendments and any assignments. In addition, work with the lender to procure as much information as possible about the underlying asset (the home). The lender will probably have extensive records of the property and as you receive more information you will be able to more accurately evaluate the investment opportunity.
While this is but a short list of considerations please be prepared for what non-performing note investing really can be. There is plenty of opportunity to attain high returns with these types of investments but you need to know the full scope of work involved with these investments before laying your cash out there for the investment.
Photo: Picture Perfect Pose