When you look to invest in notes, you must first determine if the note is performing or non-performing. What is the difference between performing & non-performing notes?
Imagine a property purchased for $25,000 cash in Anytown, USA. That same property is sold on seller-financed terms for $50,000 with 10% down and monthly payments of $500 at a 10% interest rate. The seller carries the legal contract or note signed by the buyer. On a balance sheet, you would list the note as worth $45,000 ($50,000 – 10% or $5,000 = $45,000). Over time as the buyer makes payments, you can determine if the note is “Performing,” “Sub-Performing,” or “Non-Performing.”
What is the Difference Between Performing & Non-Performing Notes
A performing note is one where the payments are made on time by the homeowner to the note holder. The best way to keep track and prove that a note is performing is to keep a copy of the canceled checks, or a copy of the checks. You can sell a performing note on the secondary market for anywhere between 75%-100% of the current note value.
A step below a performing note is the sub-performing note. The note holder experiences receiving late payments often of 15 days to 60 days. The note holder has to prompt the homeowner frequently to stay within the guidelines of the contract. At times real estate attorneys have to get involved, but overall the contract gets paid down. A sub-performing note can fetch between 50% – 80% of the value on the secondary market.
The kind of note we are most interested in as a real estate investor is a non-performing note. This note is in default, and you can no longer expect repayment against the original terms of the note. What makes a non-performing note so attractive to a buyer is the opportunity to purchase the asset at a deep discount. That purchase at a discount allows you to re-work the note or take back the asset. You can say, as a note investor, you can help people stay in their homes after “life” happens to them. You can find non-performing notes for anywhere between 10% – 50% of the note value for residential properties on the secondary market.
Moving Forward a Year, Here are some Valuations of the Note.
If it’s a performing note, Hause01 at BiggerPockets writes, ”the balance after one year will be approximately $43,500. That means the note could have a sales price of roughly $32,625 (75% of its current value) on the secondary market.”
In Hause01’s second example, “Compare that same performing note to a non-performing note. Assume 6 of the 12 payments over that first year are successfully collected, leaving a current balance of $44,000. The note is currently uncollectible. You can sell for approximately 50% of the note value or $22,000 on the secondary market. When you combine the $3,000 in payments received for 12 months, plus the original down-payment of $5,000, plus the sales price of $22,000, you can sell the non-performing note and collect a total of $30,000 in one year for the property. That’s a 20% return on your original $25,000 investment.”
Paige Panzarello, the “Cashflow Chick”, Founder of The Tryllion Group, Investor/Entrepreneur having done $150 Million+ in real estate transactions; Specializing in Non-Performing Notes. She has been a regularly featured guest on “The Cashflow Guys” podcast, and you can also find her on many other Real Estate and Entrepreneurial podcasts, and in the Wall Street Journal as well. She also speaks at various Real Estate Investing clubs and conferences across the country. Paige teaches the “Building Wealth with Notes” Workshop that drills down into the details of how to successfully buy Non-Performing Notes, create passive income, and mitigate risk. www.CashflowChick.com/training
Surviving the crash of 2007, Paige knows how “life happens” every day. Her passion is to help people build wealth, secure their financial future, to enjoy life, and to be ready-not broken! Whether it is improving communities one house at a time, helping borrowers stay in their homes, or working with other investors to learn a new way to earn higher investment dollars for their retirement years potentially, Paige is dedicated to helping people improve their lives in every way. For more information got to www.CashflowChick.com
Photo by Daniel Korpai on Unsplash