Investors buy non-performing notes because of the discounts that come with “buying distressed assets” – those discounts mean more ways to profit from the investment and also mean that the principal in the investment is secure because the value of the collateral (the property) is so much more than the price paid for the non-performing note.
It’s not uncommon to hear high 50s on pools of residential 1st position notes and even in the 80s on non-performing commercial notes but none of these are hard and fast rules and each acquisition should be evaluated independently based on what you know about the asset(s) in question.
How To Sell Notes to Non Performing Note Buyers
The hedge funds in turn will sell the notes as a one off to individual investors that are either interested in the note, or interested in acquiring the underlying collateral. The hedge funds will rent out or lease option the properties with values exceeding $125,000 for and hold them for 3 years.
Investing in a note is not the same as investing in the real estate or business. You have a completely different interest in the property, you have the right to receive payments on the note and you have the right to collect when it is in default.
For buyers, the benefit of purchasing a non-performing note is clear: the chance to get the loan and underlying property at a steep discount from its initial price. After purchasing the note, the buyer has options: negotiate a new loan with the borrower, or foreclose on the property itself. More often than not, the buyer—often a developer or experienced real estate investment firm who sees a chance to turn the property around—wants to own the site and will foreclose.
What Is A Non Performing Note Sale
In today’s market, there are simply too many non-performing loans for the lenders to effectively resolve them relying on the same old processes. Lenders are not as adept at quickly adapting to market forces resulting in trillions of dollars in non-performing notes waiting for resolution and it is growing much faster than the lenders can handle.
Where To Buy Non Performing Notes
For many buyers, non-performing notes are attractive investments because they typically trade at a large discount off of the secured property’s perceived value. In fact, it is not uncommon to see non-performing notes trade at a discount of up to 80% or more off of the unpaid balance. It should be remembered, however, that this discount is a reflection of the note’s distressed condition and/or the condition of the asset.
Purchasing Non Performing Notes
In addition to the above and like any other real estate investment, one must determine the appropriate exit strategy. In other words, just like the lender, the borrower now holds a note that is not performing and which will require resolution. Those options include following:
In multifamily alone, there are billions of dollars worth of outstanding, distressed debt. Whereas a few years ago, banks would have been more inclined to foreclose on a non-performing commercial real estate property, they are now choosing to sell the note.
Buying Non Performing Notes
Below is a table to contents for this (rather large) page. At the bottom of this page you can find links to other resources where we’ve gone in-depth into different aspects of working with banks, and notes, and specifically non-performing notes.
Biggerpockets Non Performing Notes Information
A bank can sell and close on a non-performing loan sale in under a month. That means they’re refilling their coffers and eliminating a ton of man-hours, legal fees, and months of effort. Consider what’s involved in foreclosing on a property, probably “booking it in” (meaning that they buy the note back at auction), then listing it and selling it.
Non Performing Real Estate Notes For Sale
So as to not leave you hanging completely I’ll tell you that we’ve seen as little as 6 cents on the dollar on non-performing junior residential notes and as much as par on commercial non-performing notes (‘par’ means face value).
6 Things To Consider Before Purchasing Non-performing Notes
However most of these notes are in the $125,000 range. Upon purchase, the note buyer “steps into the shoes” of the lender and assumes all rights and remedies that the lender had under the loan documents. This is accomplished primarily by the assignment to the borrower of the loan documents; including the note, the mortgage and security agreement and, if applicable, the guaranty.
Non-performing notes are priced very aggressively because the bank has a wart on their balance sheet that is not only performing, but has not yet gone through the foreclosure process to wash out the liens and other clouds on the title that keep the property from re-structuring towards a performing asset again. Often, non-performing notes involve a lot of work and will have plenty of obstacles to over come once purchased, but the bank realizes this and prices the asset very aggressively to sell.
I’ve been very fortunate to have been involved on many sides of the non-performing notes business. Most of my professional experience with non-performing notes has been as an agent of the seller and as an auctioneer.
Non Performing Notes Vs Performing Notes
There are many examples of buyer success in this depressed market. For example, I recently observed the sale of an 80-unit complex in the Dallas submarket. At the time of foreclosure, the C+ asset was at approximately 55 percent occupancy. Nine months and a couple hundred thousand dollars of improvements later, the new owner was able to successfully remarket the property and achieve 80 percent occupancy. This was made possible because the note was purchased at a deep discount, and the owner could invest money improving the property and could be extremely aggressive with its rental rates, a luxury the prior owner didn’t have because he had gotten in at a much higher price.
Funding For Non Performing Note Buyers
Hardly any other asset can offer such aggressive pricing and strong rewards for investors. As the housing correction continues to take place for the next several years, more and more opportunities will be available for investors who are well positioned and willing to take on risk for big rewards. It is the perfect option to control real estate with an option and not have any of the downsides associated with property ownership for pennies on the dollar. An incredible once-in-a-lifetime market condition.
What Do Non Performing Note Buyers Look for in a note?
I’ve had a front row seat to see how lenders make decisions to sell non-performing notes but in addition to that I have interviewed dozens of experts with experience at one end or the other of the non-performing note business including hedge funds, regulators, bankers, wholesalers, flippers, brokers, and private investors – we put this altogether for you here and throughout the site.
The list goes on. Once a bank adds up all the costs and time that it can take to deal with foreclosing on a lot of non-performing loans you can see pretty quickly what the advantages are to simply selling notes.
I should point out that banks aren’t the only sellers of non-performing notes (in fact you can find list of the different places where you can buy non-performing notes here) but banks and credit unions are where most non-performing notes originate. Almost anywhere else that you buy them means one or more middlemen and therefore higher pricing.
The growing trend for resolution is the direct sale of the non-performing note where the lender simply decides to let someone else deal with the problem. The bank realizes it has a wart on their balance sheet that is not only non-performing, but has not yet gone through the foreclosure process to wash out the liens and other clouds on the title that keep the property from re-structuring towards a performing asset again. Often, non-performing notes involve a lot of work and expense. Over the life to the process it could reach as high as $50,000/property. This is due in part to the high cost of foreclosure which typically can run has high as $25,000 not to mention the cost to manage the REO, possible fix up and other related selling costs Therefore, it is cheaper for the lender to sell the non-performing notes these “toxic” assets in pools to hedge funds. a discount to a buyer(hedge funds). This process allows the lender to quickly recover its capital without the time and expense of foreclosure and subsequent marketing and sale of the property.
Sometimes a lender will have a non-performing note on an asset, like a gas station or an old factory where they don’t want to foreclose due to the possibility of the existence of environmental contamination of the land.
Non Performing Notes For Sale
You also have the right to renegotiate the note with the borrower and you have the right to repossess or liquidate the property or collateral to collect what’s owed.Lets get a little less obtuse and take a look at real non-performing note strategies. Each of these is one that I have either been involved in personally or that I have learned about from the investor using the strategy.