A friend of mine who is also a private money lender told me that he had a mortgage note that he would consider selling. This friend of mine holds a lot of mortgage notes and he likes the passive income they provide him each month. He told me that the note was non-performing, meaning that the borrower had stopped making payments. The borrower had a twenty year mortgage that he made payments on for the past twelve years. But then he died. And his family has no interest in his estate, as far as I know. That means as the new lender, I’ll have to go through the foreclosure process to collect the unpaid balance on the note. It’s kinda like when a tenant stops making their rent payments. The landlord has to work with the tenant to catch up on missed payments plus fees or begin the eviction process. In this case, the lender (now me) has to go through the foreclosure process.
So why would someone invest in a non-performing mortgage note?
There’s several good reasons you would want to purchase a mortgage note.
First, you can buy the mortgage note at a discount.
Let’s say the original loan amount is $100,000 and the borrower made payments for 10 years at 6% amortized over 20 years… The unpaid mortgage amount would be $64,531.63 But I don’t want to pay what’s owed, I want a deal! So I offer $45,000. And the unpaid balance doesn’t change just because I buy it at a discount. So for the sake of the example, I buy a $64,531 note for only $45,000. That’s how you get a deal. You can do that with any mortgage note. And the notes that are non-performing are the ones that sell for the biggest discounts!
Second, your investment is secured by the real estate.
If the loan amount is $64,531 and you pay $45,000 and the house is worth $150,000… Then you have an investment to value rate of 30%. That means if you end up with the real estate, you only pay $0.30 on the dollar for your investment. Now that’s investing!
Third, your investment earns a default rate of return during the foreclosure process.
During the default period i.e. when the payments are beyond 3 months late… the interest rate on the loan accelerates to the default rate. If your note is 6% and the default rate is 21%, then you begin earning the higher rate of 21% as soon as the note is in default. If you purchase the note at a discount, plus earn the 21% on the missed payments means your investment dollars will be working very hard for you!
Fourth, the investment is very passive and requires little from the investor.
I would like to be on the financing side of real estate investing 100% because that’s the most passive side of the deal. A passive investment is really powerful because it makes you money whether you get out of bed or not. Now compare that to flipping a house — if you don’t show up, make your calls, make sure the work is being completed… then you can almost guarantee that you will lose money.
What I’ve learned about the foreclosure process so far…
While I’ve owned performing notes and created new notes via financing, this is my first time investing in a non-performing note. My one concern about investing in a non-performing note was that the courts would not complete it for a long period of time due to COVID and my capital would be tied up for a long time. But since the property is vacant and the borrower is dead, there’ s smooth sailing all the way through the courts! So far, it’s been a cake walk. The only work includes making a few phone calls. Phone calls to real estate attorneys to handle the foreclosure… Phone calls to the county to get a death certificate for the borrower… And phone calls to a contractor to board up the property so no one breaks in… It’s been great! Now that it’s in the attorney’s hands, he takes care of the rest of the process. I just have to wait it out and then I get all of my investment capital back. I haven’t really had to think about it much, I just know that it’s taking its course. Now that is a passive investment! *** I really enjoy mortgage note investing, if you have interest in learning more about investing in paper, please let me know by sending me an email at Nico@Cordova1031.com with ‘Paper Investing’ in the subject line. I have quite a few resources available and would love to share!