Why non-performing notes?

[Jeff B.]

I can understand investing in notes backed by real property.

I can't understand intentionally buying a non-performing note.

In either case, the only security is a position in the foreclosure queue, but unless you're in a position to buy out all superior notes and liens, you loose.

Can anyone enlighten me?

[Scott Carson]

You are partially correct.  Let me give you a different example.

I just completed a FC on a non performing note in Cape Coral, FL.  FL foreclosures can run up to 18 months.  This one took 9.  Borrower owed $120,000 plus 2 years of back payments.  Property was worth $110,000 when we bought it.  It was occupied by the home owner.   

We purchased the note at $50K.  We proceeded to reach out to the borrower who did not contact us immediately and so we continued with the FC.  As we got to the last month, the borrower reached out and wanted to do a loan modification but at only $500 per month.  Normal rent is at $1100 for a similar property and the existing payment was $800 a month.  We would have kept her in the house if she had $10K to bring to the table and kept her at the existing payment.  Six months of $800 = $4800 + $10,000 would equal almost a 33% yield for us in year one.  At the end of year two, we could sell the reperforming note at 85%+ of the $110K for a huge windfall.

Unfortunately for the borrower, they could not bring the $10K to the table so we finished the FC.  The nice thing is that in the last 9 months, the asset has appreciated to $130K.  We paid the borrower $1K to move out and leave it in good condition and are putting $5K into paint and carpet with $3500 in FC fees.  We are out of pocket right at $60K and days on market are less then 30 in Cape Coral for a similar home.  So we should end up at around $55K+ in profits which is almost a 100% return for a 1 year deal.  

Yes, we do see ugly deals but not every deal is as ugly as you paint the picture because we only buy decent properties.  Many if not most of the time, we modify the payment to keep the borrower in the home and we are seeing a double digit return from this.  Remember that most people are upside down still or can't pay the 2-5 years of back payments but can make the existing payment or something close to rent.  After 12 months of on time payments, you can either resell that asset as a performing loan or get them refinanced out at 90%+ of value.

There is a reason that banks are in the paper game and not the rehab game.  We don't focus on rehabbing the asset, we focus on rehabbing the borrower!

I hope that this helps!