This video course with Jack Krupey covers non-performing notes in four parts. It is for note investors who want to learn about notes that are not being paid.
Two related videos follow the course: an introduction to non-performing notes and a look at alternatives.
After the videos, a written guide covers the basics of non-performing notes in the Academy’s words: what they are, how investors resolve them, and what to check before you buy one.
Part 1 of the course
Part 1 of Jack Krupey’s course on non-performing notes.
Part 2 of the course
Part 2 of Jack Krupey’s course on non-performing notes.
Part 3 of the course
Part 3 of Jack Krupey’s course on non-performing notes.
Part 4 of the course
Part 4 of Jack Krupey’s course on non-performing notes.
Non-performing notes 101
An introductory video on non-performing notes.
Non-performing note alternatives
This video looks at alternatives for non-performing notes.
What makes a note non-performing
A note is performing when the payor pays as agreed. It becomes non-performing when the payments stop or fall well behind. There’s no single industry definition, but many investors treat a note as non-performing once it is several months delinquent.
Non-performing notes usually sell at a deep discount to the balance owed, because the buyer takes on the work, cost and uncertainty of getting the loan paid again or recovering the property. The investor is really buying a problem to solve, with the property as the backstop.
Common ways investors resolve a non-performing note
- Reinstatement. The payor catches up on missed payments and the note performs again.
- Loan modification or payment plan. The terms are changed so the payor can afford to pay.
- Discounted payoff. The payor or a new lender pays off the note for less than the full balance.
- Deed in lieu of foreclosure. The payor signs the property over to the note holder.
- Foreclosure. The holder enforces the security and takes the property or sells it at auction.
- Resale of the note. Once a note is performing again, it can often be sold to a buyer of performing paper.
Foreclosure procedures, timelines and borrower protections vary by state and province and change over time. Get advice from a qualified attorney in the property’s location before you buy.
Worked example: counting the costs
Here is a purely illustrative budget for a non-performing note that ends in foreclosure and resale. Real costs vary widely by location, property and timeline.
| Item | Example figure |
|---|---|
| Price paid for the note | $50,000 |
| Legal and foreclosure costs | $5,000 |
| Unpaid property taxes | $4,000 |
| Repairs, holding and selling costs | $12,000 |
| Total invested | $71,000 |
| Example resale price of the property | $110,000 |
The gap between what you invest and what the property brings is your cushion. Underestimate costs or overestimate the property value, and that cushion shrinks quickly. If the payor reinstates instead, many of these costs never arise.
Questions to ask before buying a non-performing note
- What is the property worth today, and what condition is it in?
- Is the property occupied, and by whom?
- Is this a first lien or a second lien, and what is owed ahead of it?
- How much is owed in back taxes, insurance and other charges?
- How long and how costly is foreclosure where the property is?
- Are the note, security instrument and assignments complete and in order?
For more on this topic, see buying non-performing notes.
