Risk on NPN 1st mortgage

[Jay Jasunas]

So I have been investing in buy & hold SFR. I am looking to juice my returns in a Solo 401k with about 150k in it. So I was thinking about note investing as the 401k will defer all the taxes.

What is the downside risk if I buy a NPN 1st lien for a huge discount and the UPB of the note is still only 50% of the market value of the residence it is securing.

I see upside if I can modify the loan to get them performing or if they start paying again. But in the case of getting a DIL or even foreclosing, would I not eventually get all my principle and more back along with interest and penalties. What am I missing?

[Chris Seveney]

@Jay Jasunas

There are many inherent risks. The value is always the top priority as in most instances you do not know what the inside of the property looks like. There are also other taxes, liens etc. on the property.

Then there is the borrower who is not paying. Can you get them to repay? Can you foreclose? Will they file BK to stop the foreclosure? Is the chain of title clear? Is it in a state where there is a redemption period? 

If you do your due diligence then notes can be a nice investment. If you have never purchased a note and do not have any note training, I recommend against purchasing it as there are many "gotchas" that can turn what looks like a decent investment into a very big loss.