FAQ (Non Performing Notes or NPNs)
What is a Non Performing Note?
A non-performing note (NPN) is a property, usually in the commercial definition that is no longer able to sustain itself and defaults on its mortgage debt. Non-performing notes are a hot item for investors to get their hands on these days. They have been the bread and butter for the lucrative investor and it’s subscribers for the past several years. With tight credit markets, high unemployment and continued downward pressure on consumer spending and real estate prices, more performing properties will become non-performing notes.
How do Asset Sources price Non Performing Notes?
Non-performing notes are priced so aggressively because the bank has a wart on their balance sheet that is not only performing, but has not yet gone through the foreclosure process to wash out the liens and other clouds on the title that keep the property from re-structuring towards a performing asset again.
Why do investors purchase Non Performing Notes?
The reason that so many investors both large and small seek non-performing notes is because of the extremely attractive pricing. Banks typically will not carry any debt on a non-performing note, which means investors have to be well financed in order to successfully close a transaction.
How can Investors profit from purchasing Non Performing Notes?
The Quick Flip Approach
The most desirable option when buying Non Performing Notes is to buy properties at favorable discounts, and sell them quickly for an admirable profit. With this method, you will have the luxury of avoiding delinquent homeowners. Let’s say you buy a $1 million property at 20% of the unpaid principal balance (UPB), and swiftly sell it at 30% of the UPB. You just made $100,000 profit.
The “Cash for Keys” Approach
A second possibility is “cash for keys.” With this method, you can buy out the former homeowner who still lives in the property. For example, you pay off the homeowner by giving them $10,000 cash; they will sign a Deed in Lieu, and shortly after, leave the home. As the owner of the NPN, you were able to avoid fees attached to foreclosing on the property, and help out the former owner by not placing a deficiency judgment on them, or reporting a foreclosure to their credit report. Now, you can quickly list the property for sale on the market, or rent the property to a tenant for a long term hold strategy.
Reduce the Mortgage Principle Balance Approach
Another option is to negotiate a deal directly with the homeowner, and bring the property out of its non performing state. This option is the most challenging and will require a team to work out the non performing notes with the homeowners. For example, let’s say you purchased a non performing note for $40,000 but the unpaid principle balance is $200,000 with a 10% interest rate on the mortgage. As the NPN holder, you can opt to cut the UPB in half ($100,000) and decrease the interest rate to 6%. You have now written a new, and more affordable, mortgage to benefit the homeowner. After 6-12 months of timely payments from your homeowner, your once distressed asset is now a performing note ready to be resold to an investor.
