Non-Performing Real Estate Notes

Non-Performing Real Estate Notes

What is a unique and abundant opportunity in our real estate and note investment market today? – the non-performing real estate note.  Banks today are saddled with a tremendous glut of defaulted and under performing real estate paper.  Contrary to the belief of some – banks are not in the “bad debt” business – they also don’t have a strong desire to foreclose or favor holding a large portfolio of REO (Real Estate Owned) assets.  They are in the “lending” business, not the Non-Performing Real Estate Note business.

Do you think it is possible that a banker with a non-performing note might want to sell you the note at a substantial discount to achieve this banker’s goals – which might be to get this asset off of the books, comply with the regulators requirements, and regain the ability to make new loans?  The answer is YES.

What does it take to become a defaulted real estate note buyer?

Bankers do not have the time or desire to educate you – they must believe that you have the knowledge, experience and resources to effectively solve their problems.  When dealing with these bank assets you will not be talking with the president of the bank – but usually a mid to lower level asset manager whose main focus is most likely to be his or her own job security in our current, turbulent banking environment.  If you can develop trusted relationships with these bank managers that have the types of assets you desire with the need to liquidate – and you can prove that you can solve their problems through buying the unwanted assets – than the next several years can be a great opportunity to make large profits buying defaulted note paper.

Start by learning the rules of the game of buying real estate notes – you must master the language and process of buying distressed notes to gain the credibility you will need to buy real estate notes successfully.

You need to decide what type of collateral/product/location you see as the best fit for your investment strategy.  For example, we have focused on the Western United States, trust deed states, and only good quality single family houses as our collateral.  Our group has a strong background in buying real estate notes on commercial properties and will build that part of our acquisition business moving forward – but you must develop a plan to buy real estate notes that works best for your note buying objectives.

Then it is time to hunt for the note sources.  Our current environment is littered with all types and flavors of note brokers.  Very few of these note brokers will prove to be profitable relationships for you – most of them are “chasing their tail” trying to sell you undesirable note paper that they have no control over and at high prices.

Learning the current market is key to making a profitable note buying decision.  Look at as many notes as you can get your hands on.  You will then get a feel for pricing and quality of the product that you are focusing on.  After looking at a few thousand notes from many different note sellers you will have a sense for a bargain when you see it.

Once the note is acquired you must follow the correct procedures for the assignments, RESPA and TILA regulations, recordings, boarding the notes with a servicer, securing the note in a vault, and then finally develop an asset management re-performance or liquidation exit strategy that fits the note paper and the opportunity.

Exit strategies in buying real estate notes are the real art of this business and the way they are handled will determine your level of success.  A short list of these include:

– Resale of the note (getting cash for notes you have purchased)

– Loan Modification/Forbearance Plan

– Short sale of the property

– Deed in lieu of foreclosure

– Foreclosure

In our next messages we will cover these strategies in more detail and discuss the opportunities we see today to purchase real estate notes, specifically, non-performing first and non-performing junior lien notes.

To your Prosperity,


Gordon Moss