3 Reasons For Non Performing Note Sales
When buying non performing notes for investment, you are looking to liquidate at a higher price than what you purchased them for. Non performing note sales are one of many exit strategies when liquidating these distressed assets.
Why would you sell a non performing note? What are the considerations? If you bought a non performing note for sale why would you turn around and sell it in the exact same condition?
Why not take it all the way to foreclosure?
Here are 3 reasons:
1. Getting a Great Deal
You bought at a fantastic discount and can make a great return without any further risk. This is a classic flip scenario where you really made the biggest chunk of money by finding the diamond in the rough, the note that the seller significantly undervalued. If you want to take that profit with a high annualized return without further risk, have your non performing note sales and realize your gains.
2. Value Add
You’ve added value to the non performing note by taking it most of the way through the foreclosure process. When renovating traditional residential real estate, the more repairs or improvements you make, the more you increase the value of the real estate. The same thing with non performing notes, the more “work” you put into it by starting and continuing the foreclosure process the more valuable the note becomes. Every step in the process takes time and/or money, which is something a future note buyer will get the benefit of.
Almost All the Way to the End
During the pandemic, many non performing notes were taken all the way to the last step of the foreclosure process: the sheriff’s sale. We were able to purchase a significant number of non-performing notes sales in which all we had to do was wait for the states to remove their foreclosure moratoria and allow the sales to go through.
The biggest risks and costs were in the past and we were able to step into the lender’s shoes right at the end.
3. Cut Your Losses
Sometimes, things don’t go your way. You paid too much, the borrower put up a strong defense, or you had unexpectedly high expenses. In these situations, it might make sense to cut your losses. These kind of non-performing note sales involve getting out of a bad position, recovering what capital you can, and moving on to the next deal.
When borrowers start repaying on a note, it’s known as a re-performing note. This is great for the borrower and for the lender as well. Re-performing notes with 6-12 months of seasoning can command a much higher price than non performing note sales.
Watch out for sub-performing notes. They are in between non performing and re-performing and typically are priced as non performing. Performing note buyers don’t want them to go non performing so require a greater discount. Non performing note buyers want to be able to make a profit in case the note goes re-performing so they want the additional discount, too.
The best reason to sell non performing notes is when you’ve made a great deal on your purchase price and you can liquidate quickly and make a large profit without taking more risk. Adding value to the note is a similar strategy while cutting your losses on a losing note might be the best outcome for you.