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.