Commercial Real Estate

3 Essential Tips for Investing in Non-Performing Notes

54 Articles Written
dangers of investing in non-performing notes

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.

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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

    Ziv Magen
    Replied over 7 years ago
    Scary post…non-performing notes sound a bit like short-sales/flips “on steroids”, with both profit opportunities and potential pitfalls multiplied tenfold.
    Replied over 7 years ago
    Ziv, Don’t overestimate the downside risk – you’re only at risk for what skin you have in the game. I surely don’t want to encourage competition in the business, but I’ve never seen higher returns in my life.
    Replied over 6 years ago
    James, Thanks for taking some time to post here. I too am looking to buy a bulk deal of NPN homes and would truly appreciate any advice that can be given. I live in a judicial state, a general estimate of the time and cost I could expect would be very much appreciated. Thank you
    Replied almost 7 years ago
    James, it sounds like you have some good experience with NPN’s and taking them through the foreclosure process? I’m looking at buying bulk deal of NPN 20 homes and trying to determine the worst case scenario as far as cost and time to get them liquidated. I’m in a non-judicial state, but a few of these are in BK. Is it feasible to think I can clear these out within 12 months max and at a cost of $5K or less each ? Any advice greatly appreciated. Thanks!
    Replied almost 7 years ago
    Dustin, I’d be more than happy to help provide some insight! I’ve sent you an email.
    Scott Dugan from Canton, GA
    Replied 3 months ago
    Hey James. I've found myself holding a NPN. The borrower wants to negotiate a repayment schedule and I'm looking for advice on how to draw up a new contract or amend the original note. Also, any tricks or leverage you know of to hold the borrower accountable is much appreciated. Unfortunately, I'm in 2nd position and the property is underwater since renovations have not happened. I hold a personal guarantee but would like to avoid suit if possible. Thank you!