It’s no secret the economy and housing crash resulted in record numbers of missed mortgage payments generating investor interest in delinquent, defaulted, and non-performing notes.
In November, the MBA (Mortgage Banker’s Association) reported 9.75% of combined loans at least one payment past due or in foreclosure on residential 1-4 property, the lowest in five years.
While these numbers are down from the highs of almost 15% in 2010, there are still plenty of mortgage delinquencies on the books. As a note broker or buyer you will certainly run across this inventory prompting this recent question from a member of the Finding Cash Flow Notes Training.
What about buying or brokering non-performing and defaulted notes?
I was at a local REIA club Monday night and was talking about my new ventures into the note business with someone I’ve been doing bird dogging with. She was very enthusiastic about notes, which was encouraging. She said she also knew some people who were working with non-performing notes and that if I got into that she wanted to have first dibs on my foreclosures.
I was wondering about your feedback on delinquent notes. I had seen marketing materials for courses like that, but had thought that the 20% that they say could wind up in foreclosure was actually kind of risky. From my experience on my job, I’ve gotten kind of gun-shy about REO’s, finding them to be a hidden sand (mold) trap. But maybe these investors love that sort of challenge? I also wonder that the attorney fees to go through a foreclosure couldn’t eat me up alive, especially if I hit the 20% of foreclosures before I got to the 40% of re-performing 🙂
They make it sound so profitable and yet I wonder that so many of you who are in the business long-term don’t seem to want to touch them.
What are your thoughts on non-performing notes?
Finding Cash Flow Notes Member
My Thoughts on Delinquent Non-Performing Notes
Thanks for the great question!
The non-performing note market takes a different group of investors.
Performing note buyers are looking for the cash flow. They want to feel reasonably comfortable that the payment will arrive each month.
Non-performing note buyers assume they will get the property back (yes some become re-performing but always assume worse case). They are buying assuming there will be foreclosure costs, repairs, surprises, more surprises, and marketing/hold times before they can resale or restructure.
It’s not that one is right and the other is wrong. It is just a different set of investment criteria and usually one investor doesn’t buy both types of notes. For more details on types of notes check out this article: https://noteinvestor.com/notes-101/define-private-mortgage-notes/
It’s also a personal preference (cash flow investing vs. discount property/fix/flip investing).
When the competition started heating up between real estate investors on foreclosure properties some discount property buyers shifted their attention from REO inventory and foreclosure sales on the courthouse steps to the source… delinquent, defaulted, or non-performing notes.
We focus on the performing seller financed note market, which is also the focus of our training course. From time to time we have personally been involved in REO or non-performing note deals but they are very close to home. I find they are extremely difficult to manage outside your own area. The length of time and legal fees associated with a foreclosure can also very greatly by state.
We don’t teach the non-performing side of the note business because:
1) It isn’t our primary focus;
2) It is a different group of investors/note buyers; and
3) There are surprises that even the best due diligence might not reveal (as you pointed out).
That doesn’t mean others aren’t making good money at it. If you have good contacts or investors for placing that kind of paper then why not get a finder’s fee for referring the deal even if you might not want to buy personally?
Here are a couple of articles of a note investor that started handling defaulted notes that you might enjoy:
De Stress of Distressed Properties and Defaulted Notes
Richard Alex says
Its very difficult to find notes period let alone non-performing notes. I have come across several notes from my web page, but I could not make a living with notes that comes to me. Perhaps you can give me advice as to where to REALLY FIND some of the notes. ? The ideal situation would be a steady flow of notes from some lender or mortgage company that is stuck…but where are they hiding?
Good response Tracy and I agree, Real estate transactions out of state or just far away from home plays into the old saying about long-distant love. Of course you’ll try to restructure the note with the payor but that often does not play out and you’ll need to foreclose then receive the property and the “thrill” of managing property far far away. Hiring out of state, attorneys, contractors, appraisers, realtors, and learning and dealing with different local, state rules and regulations… and the list goes on… who know you are a one time business transaction you rarely will receive the response and quality you would if you are working with local people/relationships. Extremely time consuming and not for neophytes.
Yes, there are tantalizing big discounts involved and pros who make good money at it but you better be a PRO in real estate, foreclosure, notes, rehabbing, selling, managing, finance, etc. or your school of hard knocks will knock you out. And it won’t feel like a spanking… it’ll feel like a beating.
Tracy Z says
Well said Kent- I always enjoy your comments and your analogies!
I am not too famiiar w/ this subject but would like to know more about it.