For many people in the country, owning a home is one of their biggest goals. However, the average home costs $408,800, an amount that most people cannot save up and pay at once. That is why 64.8 percent of American homeowners have a mortgage to pay.
As a result, the average outstanding mortgage debt across the nation now totals $17.6 trillion. And while that may scare some people looking to buy homes, it provides excellent investment opportunities for investors interested in buying bank notes, especially non-performing ones.
Bank Notes: An Investment Opportunity
A typical bank note or paper money is a promissory note the bank gives to someone that is payable on demand. And the owner of the note is the one to whom the money is owed. They are considered legal tender that you can use to settle all debts.
A non-performing note is a promissory note that is payable to a credit party due to a loan that is overdue by at least 90 days. In this case, the loans refer to mortgage loans.
Financial institutions consider a note non-performing if it is unlikely they will continue to get money from their debtors. Since too many non-performing notes decrease the institutions’ cash flow, sometimes they are sold off, which is where you come in. When you buy non-performing notes, you reduce the outstanding mortgage debt the bank holds.
Read More: Pros & Cons of Buying Short Sales
Why Should You Buy Non-Performing Notes?
Non-performing notes enable you to diversify your portfolio since you get to invest in the mortgage sector. And you can modify the loan terms to enable the homeowner to continue to stay in the home and pay you the mortgage payments they owe. Also, the notes are usually sold at a significant discount, which may enable you to get excellent returns.
In addition, when you buy non-performing notes, you will get to own the underlying collateral. If you don’t manage to collect what the homeowner owes, you can sell the home and recover your investment. Alternatively, you can foreclose the home and obtain real estate property cheaply.
Read More: The Pros & Cons of Mortgages
How to Buy Non-Performing Notes
Below are the steps you could take to find and buy non-performing notes.
- First, determine how much money you are willing to invest in non-performing notes. Bear in mind that they may be sold in large numbers. So, you may require a lot of financing to obtain what you desire. There is always the option of getting a loan or investing as part of a group to cover the acquisition costs.
- Once you know how much money you can afford to invest, the second step is to find the non-performing notes. You can do that by visiting your local financial institutions, including community and large banks, and inquiring with their trading desks. In addition, you can find the notes from equity and hedge funds, note brokers and loan sale advisors in your area.
- Hire an attorney and ask for the documentation concerning the bank notes you want to buy. Ensure the loan agreement is aligned with all the laws and regulations. And consider the appraisal value as well as the homeowner’s payment history.
- Research the current market value of the home, perform a lien and title search and discuss with your lawyer the worst-case scenario if litigation occurs. It never hurts do to do a background check on the homeowner to determine how legally troublesome they may be.
- Find a way to inspect the property to get a better idea of its state and value.
- When you are satisfied that you are getting a good deal, buy the non-performing notes. However, try to negotiate the price to decrease what you pay.
- Once you buy the note, you could attempt to reason with the homeowner and modify the loan terms to something agreeable to all of you. If that option does not work, you can hire a debt collection agency, sell the property in a short sale or foreclose on it and own the home.
When you become the new owner of the underlying home you acquired via the non-performing note, whether you flip it, rent it out or resell it as-is is up to you. Just remember, you are responsible for all its associated expenses.
Read More: What If a Short Sale Property Does Not Sell?
- Statista: Average sales price of new homes sold in the United States from 1965 to 2021
- PolicyAdvice.Net: 29 Eye-Opening Mortgage Statistics for 2021 — Detailed Overview
- Statista: Value of mortgage debt outstanding in the United States from 2001 to 3rd quarter 2021
- My Accounting Course: What is a Bank Note?
- Law Insider: Non-Performing Note definition
- Corporate Finance Institute: Non-Performing Loan (NPL)
- Invest Four More: How to Find and Buy Non-Performing Notes
- Distressed Pro: The Complete Guide to Finding and Buying Non Performing Notes
- Becker Lawyers: “Why You Should Consider Buying Non-Performing Real Estate Notes,” National Real Estate Investor
I hold a BS in Computer Science and have been a freelance writer since 2011. When I am not writing, I enjoy reading, watching cooking and lifestyle shows, and fantasizing about world travels.