As the market shows fewer foreclosures and distressed properties, you may be looking to other strategies that can help increase your investment income. Buying a non-performing note (NPN) from a lender is one way that that savvy investors acquire properties.
As the owner of an NPN, you have several options available including working out an arrangement with the borrower to receive payments, collecting the remaining payments in full or taking possession of the property. Once the property is captured by the new owner of the note (or loan), many investors will continue to their preferred investment strategy, whether that is flipping the property or keeping it as a rental with the current occupant or another tenant.
But buying an NPN for the first time can feel overwhelming. What do you need? What are the pitfalls? And what is the process? To help out, we’ve compiled our top 5 things to consider when buying an NPN.
- Current value of the underlying home. A critical starting point is the current value of the home underlying the NPN. Check out the original appraisal, which will tell you a lot about the value of the property and its condition at the time the loan was funded. From there, do your homework to determine how property values have changed since the date of the appraisal and the current condition of the property.
- Key terms of the mortgage note. You’ll want to know the interest rate, term or length of the loan, the original unpaid balance (or OUPB), and the amount of accrued but unpaid interest, fees, and foreclosure costs. Additionally, be sure that the the current unpaid balance (or CUPB) is disclosed, which includes the unpaid principal plus any accrued but unpaid interest, fees and foreclosure costs.
- Foreclosure laws. Each state has their own foreclosure laws and the time required to foreclose on a property can vary greatly. Fannie Mae is a helpful resource when determining expected timelines by state. Generally speaking, the longer the foreclosure process takes, the more expensive it will be. You’ll also want to familiarize yourself with the various foreclosure stages, and then make sure you understand the foreclosure status of an NPN prior to purchase. The further along in the foreclosure process, the better.
- NPN documents. To foreclose on an NPN, you’ll need the original promissory note, related mortgage/deed of trust and any related assignments and allonges (fancy word for a note endorsement). You also want the original title commitment and title policy to make sure the NPN you are buying is a valid first lien.
- Property taxes. Finally, check on the property taxes to make sure you understand whether there are any taxes owed and if so how much. Not much can come between you, your NPN and the underlying property — but property taxes is the major exception. If the government doesn’t get paid their due, they get to step to the front of the line and can even force sale of the property to pay of the taxes owed.
So there you have it, your guide to buying NPNs. To see some active NPNs for sale, visit our sister company, Econohomes’ website and start your NPN search.