Looking for new strategies to help you increase your investment income? Buying a non-performing note (NPN) from a lender is one way that savvy investors acquire properties.
Owners of NPNs have several options available to them including working out an arrangement with the borrower to receive payments, collecting the remaining payments in full, or taking possession of the property. Most investors who purchase NPNs stick with their preferred investment strategy, whether that is flipping the property or keeping it as a rental with the current occupant or another tenant.
Buying an NPN, especially for the first time, can feel overwhelming. Here are our top five factors to consider when buying an NPN:
Current value of the underlying home.
- A critical starting point when thinking of purchasing an NPN is the current value of the underlying home. 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 (OUPB), and the amount of accrued but unpaid interest, fees, and foreclosure costs. Additionally, be sure that the current unpaid balance (CUPB), which includes the unpaid principal plus any accrued but unpaid interest, fees, and foreclosure costs, is disclosed.
- Each state has their own foreclosure laws, and the time to foreclose on a property can vary greatly. Fannie Mae is a helpful resource when determining expected foreclosure timelines by state. You'll also want to familiarize yourself with the various foreclosure stages and make sure you understand the foreclosure status of an NPN prior to purchase. The further along in the foreclosure process, the better.
- To foreclose on an NPN, you'll need the original promissory note, related mortgage/deed of trust and any related assignments and allonges (note endorsements). You also want the original title commitment and title policy to make sure the NPN you are buying is a valid first lien.
- 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; however, property taxes are a major exception. If the government doesn't get paid their dues, they can force the sale of the property to pay the taxes owed.