“I’d rather have real estate cash flow without tenants”
What should I evaluate and determine when buying a non-performing note?
The growing trend for resolution is the direct sale of the non-performing note where the lender simply decides to let someone else deal with the problem. The bank realizes it has a wart on their balance sheet that is not only non-performing but has not yet gone through the foreclosure process to wash out the liens and other clouds on the title that keep the property from re-structuring towards a performing asset again.
For many buyers, non-performing notes are attractive investments because they typically trade at a large discount off of the secured property’s perceived value. In fact, it is not uncommon to see non-performing notes trade at a discount of up to 80% or more off of the unpaid balance. It should be remembered, however, that this discount is a reflection of the note’s distressed condition and/or the condition of the asset.
What should I consider when reviewing the borrower’s financial condition?
Buyers must be prudent and conduct thorough due diligence, not just on the underlying property, but upon the borrower, the lender and the status of the loan documents. The buyer must understand and ask:
- Why the property is distressed?
- What additional expenditures in time and capital will be necessary to either bring the loan back to a performing condition or to recover the underlying asset?
- Who are all the stakeholders?
- Is the borrower open to a loan modification?
- Is the borrower motivated and have the means to fight a foreclosure?
- Will the borrower file bankruptcy to delay the process?
- What is the exit strategy? Is there an acquisition Phase–Buy or broker the deal? Property or Paper Based Solution?
When a buyer understands these factors, the buyer will be more able to assess whether the discount being offered is sufficient enough to justify the risk.
Hardly any other asset can offer such aggressive pricing and strong rewards for investors. As the housing correction continues to take place for the next several years, more and more opportunities will be available for investors who are well-positioned and willing to take on risk for big rewards. It is the perfect option to control real estate with an option and not have any of the downsides associated with properties for pennies on the dollar. An incredible once-in-a-lifetime investment opportunity
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