How to Invest in Non Performing Loans or Notes
Buying non performing loans or non performing notes is a great way to invest in real estate. Non performing loans are loans that the borrower has stopped making payments on or the borrower is behinds on payments. In the past banks would foreclosure on these loans and sell the property attached to the loan, but now banks are selling these notes without foreclosing. Since the notes are non performing, the loans can usually be purchased at a large discount. After a NPL is purchased there are many avenues an investor can take to profit on the loan from loan modification to foreclosure. I have never purchased NPLs myself, but I am considering it as a way to buy more homes that I can either fix and flip or hold long-term.
To get more information on my investing strategy, check out my complete guide to purchasing long-term rental properties. How to Invest in Non Performing Loans?
History of non performing loans or notes
In the past, most non performing loans were serviced by the bank who owned the loan. The bank would do their best to get the borrower to make payments on the loan by offering loan modifications, allowing a short sale or in the worst case scenario they would foreclose and take over the property. In today’s market many banks are no longer servicing their NPLs, they are selling them to investors. When the banks want to get rid of their NPLs they will package up a large pool of NPLs and sell them off to the highest bidder. The companies that buy these pools are usually banks, servicers or hedge funds. Many of the hedge funds, banks and servicers will then attempt loan mods, short sales or go through foreclosure. For the most part it is very difficult for an individual investor to buy NPLs, because they are sold as large pools of loans spread out across the country and cost hundreds of millions of dollars. However, there are more companies breaking apart the pols of NPLs and selling them to individual investors.
How can an individual investor purchase non performing notes?
There are a few hedge funds who are purchasing large pools of notes and then selling the notes off individually to investors. Granite Loan Solutions, a NPL seller has given me a ton of information on the process of buying and making money off of NPLs. I was very impressed with their system and how they do business. You can buy loans directly from Granite or many other NPL companies and platforms.
What are you buying with non performing loans?
Please note I am only using information from Granite Loan Solutions and other note selling companies may do things differently. Granite guarantees the note you buy is in first position, they give you title insurance, a BPO (broker price opinion) value from a third-party, the original balance, taxes owed and their buy it now price. They give everyone a pre-list of available notes coming up for purchase and then once they post them it is a first come first serve buying process. There is no bidding against other investors or waiting for your offer to be approved if you pay their asking price. It is possible to offer less then their asking prices, but they may not take it depending on the demand for the note. Once you agree to buy the note they give you 48 hours to perform your own due diligence. You can run your own title searches, determine value, etc.
Why buy NPLs?
Most of us have seen REO inventory decrease and prices increase in our local markets. It has been harder and harder to find good deals to invest in and NPLs offer an alternative to what is available on MLS. Granite says they price notes at about 50 cents on the dollar of market value. This can go up or down depending on the property and circumstances, but there is money to be made on these deals. It is not easy money, because the buyer of the note has to decide how to make the note performing or create an ownership right in the asset. Granite Loan Solutions helps the investors with gaining ownership or creating a performing note.
You can buy NPLs with the intention of taking ownership over the property or by making the note performing.
Servicing non performing loans
Once an investor purchases non performing loans, they have to decide how to make money on the note. The borrower is not making payments and they may or may not be living in the home anymore. There are many options to pursue with these notes, all of which can be very profitable. Since the investor owns the note they can be very flexible working with the homeowner to help them stay in the home or allow a short sale. Most real estate investors have no idea how to complete a loan modification, allow a short sale or foreclose on a home. Granite Loan Solutions has many partnerships with servicing companies who can help with short sales, foreclosures and loan mods. They also make sure the investors have all the proper paperwork and licensing when purchasing the notes. As the owner of the note, the investor can pursue any course of action allowed in the Deed of Trust for the property. According to Granite some investors will work diligently to keep a homeowner in the house and other investors will foreclosure right away.
What price range are the non performing loans?
Granite Loan Servicing specializes in lower priced homes. Most of their notes are priced under $50,000 and some are even priced under $10,000! This allows an investor to get into the NPL game without risking a ton of money. This also makes the margins a little tight if you are looking to make quick cash on these notes. I would prefer purchasing a note on a $150,000 house for $75,000 over purchasing a note on a $50,000 house for $25,000, but you take what you can get. According to Granite there is a lot less competition for the lower priced notes and that is why they can sell them so cheaply.
How to make money off non performing loans?
Loan modification and refinance
Assuming you are able to buy a note there are many ways to make money on that note Granite Loan Solutions detailed a great way to make money with a loan modification and refinance. Lets assume you buy a note for $50,000 on a $100,000 house. The people still live in the home and want to stay, but can’t afford the payments on the $150,000 loan they took out five years ago. They know the house is worth $100,000 and are fine with a loan of $100,000 at 5% interest. The investor who owns the note modifies the balance to be $100,000 (still $50,000 over what the note was purchased for) and lowers the payments to something the homeowners can afford. Once the homeowners make three months worth of payments, they are now qualified to refinance under HAFA program for an even lower rate. When they refinance the home, you just got your note paid off at $100,000 that you bought for $50,000 and you helped a family stay in their home.
Deed in Lieu
Granite claims they have already negotiated a Deed in Lieu on some of their notes. A Deed in Lieu is when the borrower signs over their rights in the home to the note holder. These can be tricky if there are other liens against the property and it is best to let the servicer work out all the details and make sure you get a clear title to the home. Many banks try to get a Deed in Lieu because it is much cheaper and less involved than a foreclosure.
Long-term hold on NPLs
One strategy regarding non performing loans is to make them a performing note with a loan modification as described above and then keep the note. The investor who purchased the NPL now has a performing note and the borrowers will be making their payments to the investor as long as they own the home. Once the note becomes performing it also becomes much more valuable and could be sold on the market to another investor who is looking for a performing note.
Short sale on a non performing note
If an investor buys a note and the borrower wants out of the house a short sale may be the best option. If the non performing loan is the only loan on the house then the investor has complete control over the short sale process. He can approve or deny any offer since he is essentially the bank now. The investor should be able to make a nice profit even after paying Real Estate agents and closing costs due to the low cost of the note. If there are other loans on the property then you would have to negotiate with those lien holders and it gets much more complicated, but is possible. Here is an article that explains the short sale process.
Foreclosure on a non performing loan
If an investor has tried a loan mod, tried a short sale and nothing is working than foreclosure might be the only option. If anyone is thinking about buying non performing loans I would always calculate profits based off the worst case scenario and that may be foreclosure. Granite estimates costs of $5,000 to $7,500 to complete the foreclosure process. The nice thing about foreclosure is once the process is complete, the investor owns the home and has complete control over it. The investor could rent the home, sell it as is, fix it up or even price it so low at the foreclosure auction that another investor buys it at the auction. Granite’s servicers will help with the entire foreclosure process and their fees are included in the estimates above. One very important thing to remember with a foreclosure is how the state laws where the property is located. In some states you can foreclose in 45 days or less, in other states it can take over two years to foreclose.
Additional companies that sell non performing loans
I have no experience with any of these loan selling companies, but I have heard good things about Gemini and PPR.
This is all very new to me, I learned most of this about two weeks ago at my conference and I am by no means an expert. I am very intrigued by the possibilities of buying non performing loans for flips and long-term rentals. It appears most of Granite’s notes are priced lower than where I like to have my rentals, but there may be possibilities to make money by using the other methods I mentioned. I plan on doing more research on other companies and maybe I will venture into this field some day.
Investors can be vetted with Granite Loan Solutions on their website at http://www.granitels.com/contact.html. The vetting process is free on Granite’s website and allows investors to see what loans are available. I have never bought a note myself and I have no personal experience with Granite Loan Solutions, but I know investors who have bought non performing loans from them and made money.