Who Would Buy a Non-Performing Loan?

Whenever I talk to someone about the note business, I always start off describing loans that are being paid down monthly. Most people already understand the concept of owning a home that they can rent out for cash flow. It’s when we talk about investing in the debt payments apart from owning the property that eyes start to glaze over.

However, given enough time and a few actual examples, I can usually get them to grasp the concept that we can purchase the paperwork that directs mortgage payments to us rather than the bank or other lender. Although no one is claiming this is risk-free investing, there are advantages to letting the home owner take care of taxes, insurance, repairs and maintenance. If we own a rental property, all those (plus the dreaded middle-of-the-night calls) are on our plate.

So, the main attraction of buying performing loans is that the cash flow has already been established and we anticipate it will continue into the foreseeable future. That, and the fact that the borrower is responsible for the upkeep of the property, makes for an attractive investment.

A non-performing loan, also called a non-performing note (NPN) is a different beast altogether. This is a note and mortgage (to cite one example) that is in default. For whatever reason, the borrower is no longer making payments. Quite probably, they aren’t paying taxes and insurance either. In fact, they may have already abandoned the property, often leaving much of their junk behind.

So who in their right mind would pay good money for such a deal? Well, most of them have been active real estate investors for some time. Many of them have bought properties that have come through the foreclosure process and have fixed them up for resale or to hold as a rental. They have learned that nice profits can be made by solving someone else’s problem. They realize that a cash investment beyond the purchase price is part of the deal, as is a holding period during which money will be going out with none coming in.

These are investors who are most likely to understand the risks and rewards of buying NPNs. They can purchase the notes at a large discount, even deeper than they can buy actual houses. They have several exit plans they can choose from, depending on how long they want to hold the property (if at all) and whether or not someone is still in the home. I’ll cover those options in a subsequent post.