Investing in Non-Performing Real Estate Notes

Hi, this is Frank Chen with REIClub.com, the only site you need as a real estate investor. Today I've got a quick video on non-performing notes.

Real estate notes are a form of real estate investment that is created when a loan provider sells the repayment terms to another party, usually that party is an investor.

Basically, whoever is the holder of the real estate note is the party that receives repayment from the borrower on the loan, no matter who financed it originally.

Transferring nonperforming loans to an investor is just ONE way lenders can recover some of its capital investment without enduring the costs and time required to foreclose on a property. Plus, the new buyer of that note benefits with a discounted purchase price and the option of working out a payment plan with the homeowner or eventually acquiring the property and its underlying collateral.

Example:

House sells for 100,000. Buyer puts 20,000 down, leaving note of 80,000 with principal and interest payments of $450 per month.

If investor can buy the note for say 50,000 because the bank wants to get rid of it, investor has a 100k property for half price. Investor can work out payment plan with borrower (homeowner) and get monthly payments or take property back to resell, rent, etc.

Non-Performing Notes Advantages

• Returns from notes tend to be more stable than stock portfolio's, and higher
• Volume – Lots of them, and lots of people selling them
• Usually sold at a substantial discount 10-50% to investors
• Most notes have collateral attached – real estate
• The Note Holder (investor) is the one usually in control
• Unlike Tax Liens, you have monthly cashflow – tenant pays some portion of monthly to avoid foreclosure proceedings
• Because you aren't the bank, you can be more flexible with payment
• Note Value goes up when real property value goes up
• Don't need credit to qualify and purchase them
• Deal with homeowners vs. tenants – tenants tend to care less (not all)
• Managing multiple notes is easier than multipe properties – the loan, not tenants or property
• Actually helping borrowers get into good financial standing
• Versatility – Flip or Wholesale a note, rehab a note (make it performing), refinance borrower, sell it, borrow against it

Non-Performing Notes Disadvantages

• Must know the foreclosure laws of the city where the property resides
• Lots of paperwork involved to get things in motion
• Need to research for Senior and Junior Liens – 1st or 2nd mortgages
• If you need to foreclose – responsibility of the investor – time consuming
• Have to know how to negotiate with banks/lenders – BPO's
• Easily get in over your head if you don't know what you are doing – buying bad notes

Non-performing Real Estate Notes are not exactly the easiest of real estate transactions, but they do offer great returns if done correctly. More stable than stocks.

The key thing to remember when starting out is to NOT tackle this all on your own. Study up on the subject, and if need be find a mentor who has actually bought real estate notes to assist you.

Try to start small and broker your first few deals so you aren't using your own money and you will minimize your risk.

Again, this is Frank Chen with REIClub.com. Please take the time to leave your comments for this video below and please subscribe to our YouTube channel so you'll be automatically notified when we upload more quick video tips for you. Take care and good investing.