When a borrower ceases to make regular timely payments as outlined in the loan terms, the note falls into default. It is reclassified as a non-performing note.
Borrowers commonly default on loans because they’ve lost a job, fallen ill or had unexpected expenses. So they can’t keep payments up.
During the housing market collapse that started in 2007, some borrowers found themselves underwater – owing more on a mortgage than their property was worth.
Lenders sometimes work directly with borrowers to arrange more favorable terms or help them catch up on payments. But if this approach is unsuccessful, the next step may be foreclosure.
Since both remedies require a fair amount of time and resources, lenders find it more cost-effective to sell non-performing notes. To eliminate problem assets, lenders sell to real estate investors at a discount.
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Alvernia serves as your guide to real estate investing. We bring you expertise, practical experience and street smarts. That’s why you’ll find the answers to real estate investors’ questions on non-performing notes below.
Non-performing notes are popular among real estate investors. That’s because investors purchase these notes at deep discounts from the secured property’s value – as much as 80% less than the property’s value.
Notes are priced at a discount to accommodate for their distressed condition. Why?
Because there’s considerable time and cost associated with the foreclosure process. It includes resolving potential title issues, completing the foreclosure process, readying a property for sale and completing the sale.
Since these notes sell at steep discounts, savvy real estate investors can realize significant profits.
Investors who successfully navigate the process will own a note that enables them to recover the full value of the asset they purchased at a discount. That’s the way to realize impressive returns from these notes.
The communities where these homes are located benefit. As distressed or vacant properties are revived and made available to new, homeowners, the neighborhood becomes more attractive. As a result, there can be positive effects on area property values.
Purchasing a non-performing note comes with risks that require investors to perform due diligence.
An investor who buys a non-performing note gets all the benefits of owning a note. You can either collect principal and interest on the asset or sell it for a profit.
But investors also purchase any issues that accompany the note and the property. To realize a financial gain, you need to resolve the issues one way or another.
Remember, the discounted value of a note reflects its distressed condition. So it may take a lot of work to realize good returns on your investment.
Fully investigate the condition of any note you consider buying:
- Conduct due diligence on all loan documents.
- Identify any other lienholders that may have a claim to the note.
- Investigate the borrower’s financial situation. Are they open to a loan modification? Are they likely to fight foreclosure? Might they file bankruptcy?
Once you acquire a note, you need a plan of action for it. You have two options:
If the home is occupied, you can choose to modify the loan, so it’s more affordable to the borrower. Then you receive regular monthly payments based on the new terms.
Noteholders realize a financial advantage with this approach. Since they bought the note at a steep discount, they can set an interest rate and terms to fit the homeowner. They still will realize a significant return on investment over time.
Homeowner can realize a significant amount of relief when an investor buys a non-performing note. Instead of worrying about their inability to make regular payments, they may be able to work with a new noteholder to make their payments more manageable.
2. Deed in Lieu of Foreclosure
If a modification is deemed not possible, an investor can either secure a Deed in Lieu of Foreclosure on the property to recover the collateral attached to the note, or start to foreclose.
Foreclosure can consumes lots of time and additional funds. Total costs, including the purchase, rehab and legal costs quickly add up – hurting profits.
Alvernia purchases non-performing notes. We offer the opportunity to strengthen distressed communities as:
- We purchase a non-performing note and provide willing homeowners the chance to stay in their homes
- We rejuvenate a home and resell it.
These outcomes align with our purpose to rebuild communities and build opportunities. That’s how we stabilize affordable U.S. neighborhoods without displacing deserving residents.
Questions on non-performing notes? Ask here.