Non-Performing Notes are a bank/Lender originated loans that are no longer performing according to the terms they were written, thus are not producing a cash flow.
Purchasing Non-Performing Notes
Banks are in the business of lending money, not owning and operating real estate. Most banks don't like to force the sale of a property through foreclosure. There is time and costs involved in doing so. So in many cases if you catch the bank at the right time, they will sell the note in order to receive cash now. Banks don't own money, they own paper. Sometimes it's good paper and sometimes it's bad paper. The bad paper they want to get rid of. Many sophisticated real estate investors see many benefits of purchasing a non-performing note. However, buying non performing notes are not for everyone. You must know very well what you are doing and have a very good attorney that has the knowledge and experience on your side. Real estate Investors look at note buying as a huge opportunity because they can pick up a secured investment for pennies on the dollar. They will receive a very nice return for a long period of time. They also play the odds that most homeowners will sell or refinance within 5 years so they get an early payoff. Not only this, but the homeowner can usually stay in their home which creates a win, win, win for everyone.
Buying Notes vs. Short Sale
There are huge advantages of buying the note vs. doing a short sale even though they are very similar in process. One of the biggest advantages is that the homeowner can stay in their home. Short sales take a very long time while purchasing the note is a much faster process. Those that have 2nd mortgages are perfect candidates. After the mortgages are discounted, it makes the payments manageable not to mention create equity in a home that previously was upside down or under water. Now the homeowner has the option of selling and making a profit.
Once you have decided to purchase a non performing note you must take fast actions to conduct a fast and very well accurate due diligence and be ready with lots of cash for fast closing. Banks prefer those investors who has the capability to close in less than a week.