Performing vs Non-Performing Notes

Performing vs Non-Performing Notes

With many forms of real estate investing, notes can provide profitable earnings with a range of risks, challenges, and opportunities depending upon the kind of note you are investing in. For this reason, understanding the differences between performing vs non-performing notes can be crucial to the success and workload of your investment.

Follow along to delve into performing and non-performing notes, exploring their characteristics, advantages, and considerations for investors.

What are Notes?

A note (promissory note or mortgage note) is a document that outlines the specific terms of the loan like amount, interest rate, repayment plan, and any other details. The lien (or deed of trust depending on the state) is a document that records the debt against the property at the county level. The note and lien work in tandem to provide security and structure to the lender and repayment schedule.

Non-Performing Notes

Non-performing notes are distressed notes. What this means is the borrower has defaulted on their payments for at least 90 days. These notes are higher risk and come with much more work than performing notes.

Non-performing notes are for opportunistic investors who buy the note at a significant discount and can turn the investment around in a multitude of ways. Some things they could try to do are:

  • Flip the house
  • Renegotiate loan terms
  • Foreclose
  • Resell
  • Rent it out

These strategies are risky and time-consuming, but can lead to higher profits.

Non-Performing Notes: Advantages and Disadvantages

Non-performing notes offer the potential for substantial rewards, but they require much more commitment from investors.

Investing in non-performing notes allows investors to:

  • Employ strategies to generate significant profits.
  • Expand their portfolio.
  • Establish a source of passive income.

Implementing strategies to rehabilitate the property can be time-consuming, often necessitating legal counsel or taking legal action. These processes can be financially burdensome, very risky, and demanding.

Due Diligence on Non-Performing Notes

Considering the risk factor, all investors should do their due diligence when purchasing non-performing notes to mitigate risk. Investors need to:

  • Find the reason for the default.
  • Check the taxes on the property (because those are probably not paid either).
  • Review and obtain the original note.
  • Figure out the occupancy and livability status.
  • Find all the needed financial documents to fully understand the potential worth of the property.

These are critical factors in deciding if it is a good investment or not.

Performing Notes

Performing notes are mortgage loans where the borrower consistently makes timely payments according to the agreed terms.

These notes are considered less risky than non-performing notes since the borrower fulfills their regular, financial obligation. Additionally, these notes command higher sales prices because of their attractiveness to investors looking for easy cash flow.

performing vs non-performing notes
Performing notes give investors consistent cash flow through regular loan payments from the borrower

Performing Notes: Advantages and Disadvantages

As stated above, performing notes can be less risky because of the borrower’s reliable and predictable monthly payment. The monthly payment provides the note owner with passive and regular cash flow.

Another benefit to reliable monthly payments is that the risk of defaulting can be lower because the borrower is making regular payments. This means that the note owner can spend less time managing payments.

Performing notes have some drawbacks, including lower yields. Additionally, performing notes, like any investment, are subject to the bigger economy. Factors, such as interest rates and job stability can affect the borrower’s payment capacity.

Needed Due Diligence

It’s essential for any investor to conduct proper due diligence. Note investors need to vet the payment history of the borrower, review the livability of the property, and obtain the mortgage note or any other needed documents.

Starting your Journey

Understanding the difference between performing vs non-performing notes is crucial to make the right decision when investing. At SIC, we only sell performing notes because it creates instant cash flow for our clients. If you want to learn more or browse our selection of performing notes, click the link below!



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