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Real estate note investing is when you purchase a non-performing asset from a lender and then, in turn, become the lender. As Scott said, if you have a mortgage. There are two types of mortgage notes you can invest in Direct sells notes for both performing (loans being paid), non-performing (loans. Recently, I have been looking into Non-Performing Notes as an investment I would love to connect with any and all investors in this asset class as there. ALGORY CRYPTO CAP

I have not used them, but according to their website, this service promises to deliver customizable criteria for determining risk and clarity on risk exposure for investors, and rapidly identify and correct defects. Richmond Monroe — RM offer a complete collateral file review designed for note investors. Legal Due Diligence When it comes to legal matters, there is absolutely no substitute for hiring a good specialist attorney.

There are, however, some useful resources you can refer to to get an initial handle on things. This is useful for looking up foreclosure and bankruptcies. Legal Match — You can use this simple search tool to locate attorneys in the State you need them. So, there you have it, some useful tool and resources that will help you to streamline and expedite your due diligence process when buying non performing loans. First off, you may have some legal obligations around contacting and notifying you borrowers.

Workouts Through The Note If you are not specifically buying non performing loans in order to subsequently own the real estate, there may be options for you to create a profitable exit strategy or buy and hold investment without ever taking ownership of the bricks and mortar. You may have had to purchase a loan alongside other notes you really wanted to own, or the note, real estate or borrower might not be what you thought it was.

You might just have bought a note at such a good price that you prefer to sell it on for a quick profit. This being the case, you can try flipping the note to another investor who is better-positioned to take it over, or is prepared to pay a better price. You can list these notes for sale on the websites I quoted earlier in this guide such as Paperstac. I have seen plenty of investors do this with varying degrees of success. Non Performing Loan Modifications You can add a significant amount of value to a non performing note by working with the borrower to get them paying again.

I know of many investors who only buy notes where they think this is possible. Not so fast! Loan modifications are by no means easy, or even possible a lot of the time. You are dealing with real people with real problems, and many borrowers simply cannot or will not agree to new terms no matter how attractive you make it. Even just getting hold of the borrower to open a line of communication van be difficult.

Remember, these are loans that have been considered unrecoverable, so the previous lender has probably exhausted many of the options before selling the note as non performing. I used these note workouts in when I was part of a team that acquired a pool of non performing loans from a bank.

Some of those loans were immediately flipped to other investors, while others were modified and resold later. Workouts Through the Real Estate If you cannot or do not want to workout your non performing note investment through the note, you can do so or attempt to do so through the real estate. Let me explain. Taking a Deed in Lieu Taking a Deed in Lieu can work out to be much easier and cheaper than going through an expensive and time consuming foreclosure process.

Essentially, the borrower signs over title of the real estate to you — the new lender — in exchange for forgiveness of the debt. Most banks and credit unions will try to get a Deed in Lieu before selling the note as non performing. Pro Tip: In my experience, it is best to have the loan servicing company work out the finer details to make sure you get clear title, especially if there are other liens against the property.

Arranging a Short Sale If taking a deed in lieu is not an option, the next step might be to arrange a short sale of the property. If you are the only lien, then you will have full control of the short sale process. If you buy the non performing loan at the right price, there should be ample room in the sale price to cover the cost of selling the real estate, including agents fees and closing costs, as well as your profits.

If there are other liens you will have to factor in the cost of settling those too. Foreclosing on a Non Performing Loan Foreclosing on a non performing note is the backstop exit strategy for note investors. Foreclosing can be expensive and time consuming, so make sure you factor both the dollar cost and time cost of foreclosure when you make your bid.

Personally, I think you should work out your initial bid based on the assumption that you will foreclose. Once the foreclosure is complete, you will own the real estate outright. Maybe you want to rehab the home and sell it. Maybe you want to rent it out. Perhaps your may want to refinance it. Pro Tip: Make sure to research the cost of foreclosure in the State other real estate is located in before you bid. In some States the process can take as little as 45 days, in others it can take years and costs many thousands of dollars.

So that pretty much covers in very broad strokes what you will aim to do with most of your non performing note investments. In some cases, if you want to own the real estate — you might go right to foreclosure. In other cases you might spend more time and effort trying to get the note to reperform do you can keep it long term. While the return on investment from performing notes is pretty easy to define, the return on your investment in non performing loans is entirely subjective.

There are so many variables that can impact the outcome on any particular note, it really is impossible to quantify. The best I can do is speak to my own experience. That was based largely on loans we were able to modify. Those that were flipped we doubled our money on quite easily. Those that were foreclosed were also very profitable, but with a very wide range. But that was back in We were coming out of the great recession, and banks were falling over themselves to rid their balance sheets of bad debt.

While some pundits and commentators are suggesting that we are facing a similar situation with non performing mortgage debt today in the US due to Covid, I tend to disagree. The key thing to remember is that the return on your investment is your compensation for the amount of risk you took.

Ergo, a higher return means your taking more risk with your money. At the end of the day that old adage stands true… never invest an amount of money in any one single investment that you cannot afford to lose. The short answer is, yes… investing in non performing notes can be a risky business.

There are many moving parts to every single investment, so there is plenty that can go wrong… and it often does. There are various types of notes that can provide attractive returns, including longer term private mortgages or short-term loans to flippers often referred to as hard money lending. Because the loan is secured by real property, there is a certain degree of stability and security.

Notes provide consistent returns, with payments coming in each month. Non-performing notes are another facet of this asset class, and represent an opportunity with a higher risk factor, but a corresponding potential for exceptionally high returns. What is a Non-Performing or Distressed Note? If the borrower fails to repay the debt, the lender has a lien against the property and can choose to foreclose on the property to redeem their capital.

In some cases, the lender, whether a bank, investment fund or other private lender may choose to sell the note at a discount to another investor rather than go through the process of foreclosure. This can save the original lender a good bit of time and expense, and allow them to recoup an acceptable amount of their original investment. This type of distressed note can be a good opportunity for self-directed retirement plan investors.

Finding and Buying Non-Perfuming Notes It can be difficult as an individual investor to purchase non-performing loans directly. Most banks sell pools of notes to large institutional investors such as hedge funds and private equity groups. Such transactions typically run in the hundreds of millions of dollar ranges. There are many such large investors that choose to break apart their pools and sell individual notes to private investors, and several firms specialize in offering such notes.

There are also companies that market to homeowners in default, negotiate with the bank to purchase the note and then resell those notes.

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A second position note must pay off the first note in order to gain possession of a property and it could be wiped out in a foreclosure. When you buy notes, the house that the note is against may have unpaid liens.

The house may have unpaid taxes, city liens, or judgments against the home. It is very important to do a lot of research on any note you want to buy in order to make sure you are actually getting what you think you are getting! Why would investors buy NPLs? Most of us have seen REO inventory decrease and prices increase in our local markets. It has been harder and harder to find good deals in which to invest. You can purchase some notes for 50 cents on the dollar or less.

Buying notes at 50 cents on the dollar does not guarantee a good investment, but if you can buy a note cheap enough, you may be able to get a very high return on your investment. There are many different ways to make money with non-performing notes. In some cases, you may even end up with a very cheap rental property.

What do you do with non-performing notes? Once an investor purchases non-performing loans, they have to decide how to make money on the note. The borrower is not making payments and they may or may not be living in the home anymore. There are many options to pursue with these notes, all of which can be very profitable.

Since the investor owns the note, they can be very flexible working with the homeowner to help them stay in the home or allow a short sale. Most real estate investors have no idea how to complete a loan modification, allow a short sale, or foreclose on a home. Fortunately, many servicing companies can help with short sales, foreclosures, and loan mods. They also make sure that the investors have all the proper paperwork and licensing when purchasing the notes.

As the owner of the note, the investor can pursue any course of action allowed in the Deed of Trust for the property. Some investors work diligently to keep a homeowner in the house while other investors foreclose and take possession of the property. How to make money on non-performing loans Loan modification and refinance a nonperforming note Assuming you are able to buy a note, there are many ways to make money on that note. Deed in Lieu with a nonperforming note A Deed in Lieu is when the borrower signs over their rights in the home to the note holder.

These can be tricky if there are other liens against the property. It is best to let the servicer work out all the details to make sure you get a clear title to the home. Many banks try to get a Deed in Lieu because it is much less expensive and less involved than a foreclosure. How to make money with a long-term hold on a non-performing loan One strategy regarding non-performing loans is to make them a performing note with a loan modification as described above and then keep the note.

The investor who purchased the NPL now has a performing note, and the borrowers will be making their payments to the investor as long as they own the home. Once the note becomes performing it also becomes much more valuable, and you could sell it on the market to another investor who is looking for a performing note. If you are able to get a big enough discount on the note and then re-negotiate a payment amount with the borrower, you may be able to make higher than 20 percent returns on your investment.

How a short sale works on a non-performing note If an investor buys a note and the borrower wants out of the house, a short sale may be the best option. If the non-performing loan is the only loan on the house, then the investor has complete control over the short sale process. He can approve or deny any offer since he is essentially the bank now.

Make sure to check whether the real estate is located in a non-judicial or judicial foreclosure State. Also, non judicial foreclosure States have a redemption period after the foreclosure is completed. This means the home owner has a period of time in which they can reclaim their home. This varies depending on a number of factors, so ask your foreclosure attorney to advise you. This could leave you on the hook for thousands of dollars in fees already stacked up, so you will need to fade your bid accordingly.

Despite how it might sound to the uninitiated, bankruptcy is not always a bad thing for the non performing note investor. In fact, some note investors actually prefer notes where the borrower is in bankruptcy. You can also even receive payments a note during a bankruptcy. For example, during a Chapter 13 bankruptcy filing, a court appointed Trustee continues to make payments to the creditors in line with a court-prescribed bankruptcy payment plan.

While unsecured creditors like credit card companies can get wiped out entirely in a bankruptcy, mortgages notes are backed by the physical real estate. So there you have it, my initial and secondary due diligence process for investing in non performing notes. Some Useful Tools and Resources As you can clearly see, when buying non performing real estate notes, your due diligence process defines the notes you do or do not buy, as well as the price you pay.

Fortunately, there are are useful tools and resources that can help you along the way. Here are some of them that I personally use. You will find basic property data such as the number of bedrooms, bathrooms and square footage. They also give you a value range which can be very wide, and therefore not particularly useful. That said, it does give you basic property information and previous listing and sold price history, which can be useful.

But as I mentioned, you may find your Brokers Price Opinion come in way above or below, so be prepared for that. The websites listed above will certainly give you some useful area statistics as well as basic property data and approximate valuations.

They also contain some useful information information about the area such as local school districts and ratings, and crime statistics. City Data Points and Area Analysis As well as using the websites above to pull things like local area crime stats and local school ratings, there are some great online tools to help you compile more comprehensive city data points and analyze the local area and nearby metro areas.

As such, speaking to an actual human being with local market experience adds a tremendous amount of value to your due diligence process. So find a Realtor, investor or lender that works in the area and ask them about it. Title Due Diligence When it comes to potential title issues during phase two of your note investing due diligence process, you are way better outsourcing than trying to do all of this yourself.

Here are a couple of companies that can help. They will carry out a comprehensive collateral file review, as well as offering a range of additional products, including the essential Owner and Encumbrance Report, bankruptcy reports and much more. Expert Mortgage Assistance — Expert Mortgage Assistance offers a title examination service, as well as a ton of other reports and services for lenders. I have not personally used these guys, but according to their website they conduct a review of the title report including any legal claims, lawsuits, taxes, judgments, and liens.

They also conduct a quality review to ensure the right sequence of file numbers, presence of all pages, and quality of all images. This will save you time, effort, and potentially costly mistakes. Collateral File Review If you can find one, a good attorney will be able to help you review the collateral file for a non performing note purchase. But if they are not a specialist in this area, or have not provided this specific service to note investors previously, you will need to provide them with a very clear and defined checklist of items that you want reviewing.

Here are details of some specialist companies that offer collateral file review for note investors. I have not used them, but according to their website, this service promises to deliver customizable criteria for determining risk and clarity on risk exposure for investors, and rapidly identify and correct defects.

Richmond Monroe — RM offer a complete collateral file review designed for note investors. Legal Due Diligence When it comes to legal matters, there is absolutely no substitute for hiring a good specialist attorney. There are, however, some useful resources you can refer to to get an initial handle on things.

This is useful for looking up foreclosure and bankruptcies. Legal Match — You can use this simple search tool to locate attorneys in the State you need them. So, there you have it, some useful tool and resources that will help you to streamline and expedite your due diligence process when buying non performing loans. First off, you may have some legal obligations around contacting and notifying you borrowers. Workouts Through The Note If you are not specifically buying non performing loans in order to subsequently own the real estate, there may be options for you to create a profitable exit strategy or buy and hold investment without ever taking ownership of the bricks and mortar.

You may have had to purchase a loan alongside other notes you really wanted to own, or the note, real estate or borrower might not be what you thought it was. You might just have bought a note at such a good price that you prefer to sell it on for a quick profit.

This being the case, you can try flipping the note to another investor who is better-positioned to take it over, or is prepared to pay a better price. You can list these notes for sale on the websites I quoted earlier in this guide such as Paperstac.

I have seen plenty of investors do this with varying degrees of success. Non Performing Loan Modifications You can add a significant amount of value to a non performing note by working with the borrower to get them paying again. I know of many investors who only buy notes where they think this is possible. Not so fast! Loan modifications are by no means easy, or even possible a lot of the time. You are dealing with real people with real problems, and many borrowers simply cannot or will not agree to new terms no matter how attractive you make it.

Even just getting hold of the borrower to open a line of communication van be difficult. Remember, these are loans that have been considered unrecoverable, so the previous lender has probably exhausted many of the options before selling the note as non performing. I used these note workouts in when I was part of a team that acquired a pool of non performing loans from a bank. Some of those loans were immediately flipped to other investors, while others were modified and resold later.

Workouts Through the Real Estate If you cannot or do not want to workout your non performing note investment through the note, you can do so or attempt to do so through the real estate. Let me explain. Taking a Deed in Lieu Taking a Deed in Lieu can work out to be much easier and cheaper than going through an expensive and time consuming foreclosure process.

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Make Huge Profits with Non Performing Notes - Note Investing 101

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