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Non-Performing Notes: A Guide On Investing On These Notes

note investing

Non-performing notes tend to be riskier, but with the right steps, one can generate profits. For detailed information on note investment, go through this blog.

Today’s blog is a second part of the note investment training series and the tropes of this subject. If you are a beginner, then you will need to understand various points before starting as an investor yourself.

Let’s start by discussing the different classifications of notes, performing and non-performing. We will consider the non-performing notes, and how to buy them.   

The first thing that will come to your mind is “why is it called non-performing?” These notes are attached to default loans (non-payment for at least 90 days), and no one is expecting any more payment.

note investing

Now, the definition is not quite alluring, is it? Then why do investors try to purchase these notes? Well, buying a mortgage note of this category has some perks. These are:

  • Less costly

These notes are sold at a lowered price (from the unpaid principal balance (UPB)). And we know that even this price is lowered because the note is non-performing. It offers the lender the capacity of owning the property, and he does not have to worry about defaults, fees, and interests. This is where non-performing notes win.

  • More control

The non-performing notes give more power to the buyer. He becomes the lender and has all the power relevant to that capacity. Of course, some responsibilities come with that power. As a purchaser, the person can decide how to control the fate of the property.

  • More profits (it can be)

Although investing in non-performing assets can be risky, surely it comes with rewards. If you can sell the item for a profitable price if you have the right network and connections.

However, it can be riskier, and one should have an idea about it. All investors try to avoid foreclosure, because it’s a risky, and costly process, and it takes sufficient time. This is especially true if the opposite party is starting a legal battle.   

Also, the law can differ for various states and countries. And it can be a hassle to handle these processes if one does not have the right knowledge and skill. However, I think it’s still less risky than stocks, and the money market.

What are the things to consider while purchasing these notes?

While thinking about real estate notes investing, you need to consider the following concepts:

  • What class of non-performing notes is it?
  • How many non-performing notes are you buying?
  • How to purchase these notes?
  • How to deal with these notes, flipping, brokering, or selling them on a wholesale note?

Where to look for while choosing non-performing notes?


Banks are the best option for buying non-performing notes. If you are visiting a big bank, you must be ready to purchase a high volume of notes. You can also try regional banks for the same purpose. However, you need to keep an eye out for this sale, as it is not exactly advertised.     

Credit Unions

These institutes are fundamentally similar (somewhat) to banks (especially the big ones). Doing business with them is profitable, as they don’t offer any bogus assets (to protect their reputation). And these are much more accessible than the big banks. 

Special Service Providers

These people or organizations handle the loan notes and the processes associated with them. 

Hedge Funds

Hedge funds and private equity groups purchase different notes and then resell them to different investors.  

Loan brokers

These brokers can provide real estate notes and they work independently. Be careful while you are dealing with these private parties. Check if the business has a valid email id, and a proper communication channel (except social media).   

Loan marketplace

Marketplaces are tricky, but they are designed to benefit the seller. However, if selected carefully, you (the purchaser) can get proper notes (at a much better price).

Aside from all these, you can visit different places to get a real estate note according to your terms.  

How to deal with these notes? 

Try rehabbing

Buy the non-performing notes and make some changes to turn them into performing ones. If you cannot do that, you have the option of foreclosing. Several government programs come with that facility, and you can use one of them if both parties agree.

Try buying directly from the bank

For commercial purposes, it’s best to consider this approach (it gives control over the collateral). Also, it makes the investor, the controller of the property (and the decision power along with it).

Try flipping

Purchase non-performing notes, and resell them at your desired price. You can try doing that to re-performing notes too. There are many ways of doing it, but you probably need some experience and knowledge to choose this option. 

Do all non-performing notes have the same value?

Let me answer that question with another one, when does a property have the same value as another one? Rarely! Right! The same principle applies to real estate notes. The value depends on the following factors:

  • UPB
  • Interest rates, liens (along with their priorities)
  • The estimated value of the collateral
  • Location and market conditions 
  • Classification of the property 
  • Background of the borrower      

How can you generate passive income using this method?

  • Try note sourcing

If you are not sure to take a deep plunge into this concept, you can tread lightly at fast. Using your smartphone, and an internet connection, you can search for different notes. But not for yourself, other investors.

  • Develop a network

It’s best to create a network that includes other investors, sellers, and buyers. And it’s best to perform thorough research to help decide the best one. 

With proper training, one can start investing even if he does not have enough money. And with time and experience, he can create an empire that can continue growing money even when he is not actively participating.

This is the best choice of passive income for you. In the next part, we will focus on performing notes, and how to invest in them.

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