There has been an increasing buzz in real estate and real estate note circles about non-performing notes. For months, I have heard speculation about a tidal wave of non performing notes that are coming in the aftermath of the pandemic. Today, I want to focus not so much on the speculation of a tsunami of non-performing notes and foreclosures, but this question: Should I buy non-performing notes?
The short answer to that question is this: IT DEPENDS. Like most questions in life and business, this question does not deserve or merit a simple answer of yes or no. Here are my thoughts on the question:
- IF YOU ARE A NEW INVESTOR OR A NEW REAL ESTATE NOTE INVESTOR, I WOULD SUGGEST THAT NON-PERFORMING NOTES IS NOT A GOOD PLACE TO GET STARTED. The first real estate notes I bought were non-performing notes. When I bought them, I had been a real estate investor for over 25 years. Despite my real estate experience, it still had challenges. I would suggest if you are a new note investor or new real estate investor, it would be better to start with purchasing a performing note.
- DO YOU THINK YOU CAN GET YOUR MONEY OUT OF THIS INVESTMENT IF YOU ARE NOT ABLE TO GET THE REAL ESTATE NOTE RE-PERFORMING? Every real estate note has a story because people (in this case, the borrower) have a story. Sometimes, a note investor can get the note re-performing and sometimes you cannot. In that case, foreclosure is a possibility and that can take months (and sometimes years) depending on the foreclosure laws where the property is located. There is also legal expense if the non-performing note moves to foreclosure. Non-performing notes are appealing to many because you can usually buy them at a lower price than performing notes. Most of us like a bargain; however, sometimes a bargain comes with its challenges. Are you willing to have your investment tied up for months while you work out the future of the non-performing note? Only you can answer that question.
I live in the heart of NASCAR country. Many racing teams are within a few miles of my home. There is one restaurant nearby that has a race car on top of its roof. The car looks good and draws attention from the motoring public. However, that car will not get you anywhere because it is only a shell of a car. Well, non-performing notes are similar. They may look good, but they can take you nowhere in your investments if they do not provide a return on your money. Choose wisely and well if you invest in non-performing notes.
I lived through the housing crisis of 2008-2009. I profited from that housing crisis through purchases I made when I bought homes for pennies on the dollar. While I believe that foreclosures will come, I believe that the number of foreclosures will not be as many as 12 to 15 years ago. I also believe that this will be a different real estate cycle in that many homes in foreclosure will have equity. Best wishes in your investing endeavors.- R.L. Wall