What is a non-performing note?

Non-performing notes (NPN) occur when borrowers have stopped paying their mortgage to their bank. When you purchase a note from a bank or hedge fund, you become the bank and there are many strategies to employ to make the note profitable again.

Why invest in a non-performing note?

  • Ample Inventory - Non-peforming note investors see underwater properties 6 to 12 months ahead of traditional real estate investors.

  • Lower Cost - note investors get better pricing on distressed assets. Typically, non-performing loans are purchased at 40 to 60% of fair market value instead of the 80 to 85% that traditional investors pay once it hits the market as a Real Estate Owned (REO) or bank owned property that has gone to foreclosure.

  • More exit strategies than traditional real estate.

Non-performing loan strategies

Strategies to keep the borrower in their home

  • Reinstate the Loan - The borrower starts making payments against the existing loan amount. This strategy works best when rent in the area is higher than the original mortgage payment.

  • Modify the Terms of the Loan - You change the rate, term or amount due, or arrearages on the loan to a lower amount that the borrower can afford.

Strategies when the borrower does not wish to stay in the home, or has already vacated the home

  • Deed in Lieu/Cash for Keys - The borrower gives the home back to the bank (note investor). The bank may offer cash for keys to entice the borrower to give the home back in good condition before vacating the property. Once the house is returned, the debt is forgiven and it becomes a Real Estate Owned (REO) property. The bank (investor) can sell, rent, or offer owner financing to a new borrower for the property.

  • Short Sale - The house may be sold below the unpaid balance (UPB). This amount is still above what was paid for the note. In this instance a realtor would be engaged to list the property at around 85% of Fair Market Value (FMV). By listing the property below Fair Market Value, the property will probably sell much faster. Also, because the note investor is the bank, the process is completed faster than a real estate short sale with a traditional bank.

  • Loan Assumption - You swap one borrower for another. For example, in a divorce situation one spouse wants the home, but the other spouse desires to leave. You may release one borrower and the other person stays on the loan. The remaining party completes a loan application to make sure they can afford the home on their own.

  • Cash payoff - With this strategy, the borrower pays off the loan and remains in the home. The bank may offer a structured payoff over a set number of months months or determine a lump sum payoff.

  • Resell the Note - Since the note was purchased at a discount, you could resell the note and make a profit. You can add value to the note by starting the servicing, working out payment plans with the borrower, or even starting foreclosure if necessary.

  • Foreclose on the Note - Once the non-performing note is purchased, the foreclosure process is started within 30 days. It puts pressure on the homeowner to act. By starting the foreclosure process, the borrower knows you are serious about getting a resolution.