There is a huge difference between performing vs non-performing notes. As a note investor or private lender it is important to understand the value and risk in both. With returns being a reliable indicator of risk, performing notes offer less-risky but lower returns. Non-performing notes are riskier, but carry the potential to generate much bigger profits. 

When is a Note Performing?

Let’s start with the basics. A note is considered performing when all the payments have been made on time by the borrower. Investors will pay good money for well-seasoned, performing notes. If there is good collateral and a credible borrower, performing notes can trade for up to 100% of their current value. The general trading range for performing paper is between 75% and 100% of current value.

Performing notes tend to be purchased by investors that want dependable monthly income, or want to diversify their portfolios. I have also seen plenty of former rental property investors turn to note investing. It tends to be far less hassle!

When is a Note Non-Performing?

A note is generally considered non-performing when the borrower is in default. This usually occurs when payments become overdue by more than 90 days, although actual terms vary from one note to another. A note holder is likely to keep hold of a note until they believe the debt is no longer recoverable. So, when a non-performing note comes up for sale it usually means there is no hope of collecting the debt on the original terms of the note.

In terms of value, I personally have bought non-performing notes for as little as 10 cents on the dollar (in 2010). I have also seen them for sale (but have never paid) as high as 50 cents on the dollar.

Non-performing notes are a more opportunistic investment. They are essentially valueless in their current condition, but can be modified, foreclosed or ‘rehabbed’ for a potential profit.

Related Content: Note Investing 101 – A Complete Introduction to Note Investing

If It Sounds Too Good To Be True…

At this point I’d like to issue a word of warning. I have been in this game (real estate and notes) in one way or another for 10 years. A lot has changed over the years. I have won some, lost some, and broken even more than a few times. But one thing that has remained relatively constant is the popularity of non-performing notes with inexperienced investors as some kind of magical profit machine.

You do not have to search for long to find a broker or ‘adviser’ offering you the opportunity to invest in non-performing mortgages at “crazy prices”. Always with the promise of big easy returns.

This is, I think, in part due to the fact that large note investors often buy entire loan portfolios from financial institutions. In doing so they tend to end up with a lot of poor quality paper alongside the loans they actually want to own.

These notes end up for sale in the public domain. They invariably get sold on seemingly cheap to relatively inexperienced investors that do not have the knowledge, experience or resources to turn them into a profit.

Now don’t get me wrong, if you can successfully turn round a non-performing loan you are likely to make good money. And there are lots of ways to skin a cat. But it’s often an intricate job. There can be a lot of work that goes into ‘rehabbing’ a note. Some will take up a huge amount of time and resources only to result in nothing but a total loss.

If you are determined to chase the big bucks, by far the best investment you can make is in your own education. Learn the game. Read the books. Speak to investors in the space. It can definitely be done, but it takes knowledge and experience – so start acquiring those things first!

Remember, if it was that good or that easy, they’d keep it for themselves. Much like turnkey rentals!

Performing vs Non-Performing Note Investing 

Performing notes can – when well structured – offer quite the opposite experience to their non-performing counterparts.  While non-performing notes are time and resource intensive – often with no clear outcome –  performing notes offer dependable monthly cashflow and a better-than-average rate of return. They will not, however, pay off anywhere close the potential returns of a successful non-performing note investment.

So, deciding where to pitch your tent in the performing vs non-performing notes debate will depend largely on your personal goals. You should take into account your investment criteria, appetite for risk, and the amount of time and resources you are prepared to commit to your investments.

If you want dependable monthly income – performing notes are for you. if you are prepared to take bigger risks in returns for a bigger potential reward, you might try your hand in at buying some bad debt!

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