Non-performing note, second mortgage, senior lien… What does it all mean?
In this article, we’ll cover all the basics you’ll need to get familiar with to start earning profits with note investing, starting with:
What is a Real Estate Note?
Derived from the legal document ‘promissory note‘, which is a component of a mortgage that promises repayment from the debtor to the lender, a “note” constitutes both the agreement (promissory note) and conditions (mortgage note) to repay the loan, and represents the right to charge a debtor for the remainder of the loan.
The other component, referred to as a ‘mortgage note’ stipulates the conditions of how and when the loan is repaid, as well as what happens if the debtor fails to repay the loan.
Generally the property that is bought with the loan serves as collateral, thus ‘guaranteeing’ or ‘securing’ repayment.
Types of Real Estate Notes
Real estate notes are broken down into two categories, each with two sub-categories; senior or junior, and performing or non-performing, respectively.
Senior Liens vs Junior Liens
A senior lien (or first mortgage) is the first loan taken out against the property, most commonly used to purchase the property itself, while a junior lien (referred to as second or third mortgage) is any additional loan taken out against the property, generally used to pay for renovations or additions to the property.
If the property is sold or foreclosed on before any liens have been repaid in full, profits from the sale must pay off the senior lien first, then any other junior liens, in the chronological order they were taken out.
Performing vs Non-Performing Notes
A performing note is a real estate note that continues to be paid in full and on time, as per the conditions outlined in the mortgage note, while non-performing note represents a loan that has ceased to be paid for 90 days or more.
Once a note becomes non-performing, the lender or owner of the note may contact the debtor to refinance the loan and get the borrower back on track with their payments, thus making the note ‘perform’ again, or the lender may start the foreclosure process.
Once the debtor is 90 days passed due on their mortgage payments, the property is considered to be a pre-foreclosure, as legally the lender may initiate foreclosure proceedings as per the mortgage note, or in some cases may choose to make a “cash for keys” offer, skipping the foreclosure process altogether.
What is Cash for Keys?
In the lending sector, ‘cash for keys’ refers to any agreement in which a defaulted borrower is offered a lump sum by the lender to vacate the pre-foreclosure property voluntarily and peacefully, sign over the property (including the keys, hence cash-for-keys), thus skipping the lengthy and sometimes costly foreclosure process. This type of agreement often saves the lender both time and money when recuperating their investment, as they can bring their REO property to market sooner, and often with less damage to the property by a vindictive borrower.
Who can Buy Mortgage Notes
While real estate notes are generally purchased in bulk (pools) by banks, lending institutions and servicers, and REIT’s (Real Estate Investment Trusts), It is entirely legal for a private citizens or investors to purchase a real estate note, whether it be a single note purchase or a ‘note pool’ purchase.
How to Invest in Mortgage Notes
When buying mortgage notes, one must take caution and complete thorough due diligence. For performing notes, this means revising the promissory note and mortgage documents, checking the title to make sure you’re being sold a valid note, and establishing a documented trail of ownership to the selling party.
When buying non-performing mortgage notes, a more involved process is required, as one must also consider the value of the property after a foreclosure would be completed. This requires doing a title check on the proposed property, investigating the entity that is selling the property, as there are many “mortgage notes for sale” scams and fraudulent sites. It’s also necessary to check the original appraisal or have a current appraisal done, or establish the fair market value of the property through other means, examine local market prices and fluctuations, and check for overdue property taxes.
All this work can scare away many real estate investors, but if done correctly, investors can see up to 200% returns on their investments, as non performing notes (NPN’s) are typically sold at up to 70% discount of the property value, and often result in the property being transferred to the note holder.
At Urban Capital, we take the time to carry out all of the necessary due diligence required, and all of the notes we bring to market already belong to Urban Capital. No need to haggle with shady brokers or wait on hold with a bank, our team is always ready to personally advise your decision on investing in NPN’s, examining whether it is right for your goals and timeline, how the process works, and providing legal counsel should you choose to invest with us.
If you’re interested in learning how to invest in mexico with real estate, don’t hesitate to reach out to our trusted financial advisors.
Urban Capital invites all interested investors to check out Foreclosures Mexico to see a full list of our Non-performing mortgage notes for sale.
When to sell your Note
Depending on whether or not your note is performing will drastically influence the optimal time to sell, if at all.
If your note is performing and your goal is to maintain steady monthly payments or cash flow for the term of the note, your best option would be to offer to refinance the loan with the debtor, adjusting for slightly smaller payments over a longer term, resulting in you, “the bank,” earning more ROI over the long run as the remaining balance will generate more interest. In this case, you wouldn’t want to liquidate the note, but hold on to it as long as possible.
If you purchased a non-performing note, the best option is to wait until the foreclosure legal process reaches at least the half-way point, at which the note can be valued anywhere from +75% to +200% what you paid for it, depending on the legal stage of foreclosure at which you buy and sell.
Optimally, you would have bought the note in the pre-foreclosure stage and sold it just before the property goes to foreclosure auction, or becomes an REO property, or bank owned property. This mortgage note investing tactic ensures the highest return possible while avoiding capital gains tax, unpredictable foreclosure auctions, and any renovations necessary to achieve the hyper value of the property, guaranteeing a safe and profitable investment, or as we call it:
Flipping Cap
Real Estate Note Investing with Urban Capital
Urban Capital has been revolutionizing real estate and foreclosure investing in mexico since 2016, to date, we have carried out over 120 successful foreclosure proceedings resulting in title transfers to clients, and more than $5,513,800 USD in pure profit delivered to clients with flipping cap, establishing ourselves as an industry leader.
We stand alone in the industry in providing assured note repurchases; if one of our investors decides to sell their note at any given moment, we will repurchase it, no questions asked.
Urban Capital carries out all essential due diligence for each property, and our dedicated team of foreclosure attorneys manages all court submissions, guaranteeing a smooth legal process.
We also handle the legal expenses for notes backed by properties worth more than 1,500,000 MXN (around 80,000 USD), as there’s a higher probability that the repossession of such high-value properties will result in litigation.
We are proud to provide our investors with the Urban Capital Experience, our proprietary platform where our clients can monitor the performance of their investments directly from their mobile device, from any location, at any time.
These are just a few of the assurances we take pride in providing to our investors, and if you’re interested in finding out more or investing using foreclosures in mexico, please don’t hesitate to get in touch.
