Investing in Bank Notes is not for the faint of heart. But like any investment product, the higher the risk, the higher the higher the gain. Notes can be very lucrative for Investors wanting to be in the Real Estate Investing world without the problems that can come from actually owning property.
Purchasing a Note from a financial institution means you are not the mortgage holder of the property. The Bank will sell the Mortgage to an Investor at a discounted amount and now the Property Owner makes payments to you to fulfill their mortgage debt. Banks will usually sell the Note because the balloon payment is coming due and the Property Owner does not have the money to make the Balloon Payment. Many times, the Property Owner cannot re-finance the loan because for reasons brought on by the current economy. Banks may sell the Note for 60% of the face value to a Private Investor. (There is no typical figure, this is for demonstration purposes.)
There are several ways to profit from buying a Discounted Note –
Producing Note with New Balloon Due Date – The Property owner is current with payments. This strategy keeps the payments the same for the Owner but extends the Balloon payment due date for another 3 to 5 years. The example, you purchase a $600,000 mortgage for $450,000. Owner continues to make the current payment of $12,000 per month payment, same as they made to bank. At the end of 5 years, Owner owes the balance (Balloon) based on a $600,000 mortgage. If the Owner falls behind in payments or cannot make the Balloon, the Investor can foreclose in the property. The only change to the Property Owner is the extension of when balloon is due and a new company is collecting payments.
Producing Note with New Balloon Balance – Using the same example as above, the Property Owner is given the opportunity to continue making payments for 3 years but the Balloon payment is based on $525,000 saving the Owner $75,000 in principle as well as the related interest on the original balance amount. This strategy gives the Owner incentive to keep the business open to save money on the Note.
Non-Producing Notes – This strategy is for Investors interested in flipping or obtaining discounted properties for their own use. These properties are in foreclosure, many of them abandoned. The Bank may be willing to take a larger discount because of this being a distressed property. Several tears ago, I was part of a non-producing note sale and property flip. The note balance was $628,000 and the investor purchased it at $375,000. Putting the property on the market immediately after cleaning property, resulted in a sale for $485,000 in under 60 days which was still under market value. The Buyer was an end user.
If interested in learning more about note purchases or to become a member of my Member-Only Note list site, email me at InvestSWFL@gmail.com. Notes are listed on this site for 30 days before being released for public sale.
Broker/Owner, Investment Property Consultant
Real Estate Solutions of SWFL, LLC