Have you been looking at purchasing a non-performing loan (NPL)? If you’re a real estate investor building out your portfolio, NPLs may have caught your attention. But are you really sure you know what non-performing loans are? Understanding what they are can help you determine if they are a good investment option for you.
Investing in real estate or NPLs can be lucrative. However, before investing in an NPL you should consider what your risk tolerance is. In this blog post, we’ll help explain what NPLs are and answer some of the key questions you may be asking yourself.
What is a Non-Performing Loans?
Non-performing loans are loans that borrowers have failed to repay. In other words, the borrower has not paid their mortgage according to the loan agreement with their lender or bank.
When the delinquency period becomes excessive and the lender is not able to negotiate repayment, they will classify the loan as non-performing. This delinquency period can vary by lender. There is risk associated with keeping NPLs on the books. That is why a lender may decide to offload or sell these NPLs to mitigate those risks.
How Does a Non-Performing Loan Purchase Work?
NPL purchases involve an investor acquiring delinquent loans from banks or other financial institutions. The purchase price is often discounted, sometimes pennies on the dollar. The discounted price indicates that these loans have a higher risk. This can be attributed to the borrower having a history of not making payments on the loan.
When an investor purchases an NPL, they often look to profit by either rehabilitating the loan and collecting payments or liquidating the assets securing the loans. In other words, selling the property to recoup their investment and trying to earn a healthy return on that investment.
Steps You Should Consider When Looking to Purchase a Non-Performing Loan:
- Do Your Research: Before purchasing an NPL, you should educate yourself on the process. Here are a few key things to consider:
- Market Evaluation: You can begin by evaluating and identifying the best market for NPLs based on your investment goals. You may find that certain markets have more NPL opportunities than other markets. You can also look at the market itself and consider other factors like crime rates, school ratings, rental rates, home valuations, etc.
- Legal and Regulatory Guidelines: The next step is to research and fully understand the legal and regulatory requirements that govern NPL purchases and servicing after the purchase. Making sure you are in compliance with all legal requirements is very important. You should also consider working with a legal professional that specializes in real estate and NPLs. They can help you navigate the regulatory requirements effectively.
- Seek Expert Advice: When in doubt, seek advice from industry experts, financial advisors, or investment professionals experienced in non-performing loan purchases.
- Sourcing NPL Opportunities: Locating NPL opportunities can be done through various channels, including directly with financial institutions, loan brokers, and online platforms like Hubzu.com. You can find hundreds of NPLs on Hubzu by clicking here. When you find an NPL that matches your search criteria, simply fill out the form and a PreREO representative will reach out to discuss the loan and the costs to acquire the loan. PreREO can also help answer certain questions about the requirements to purchase and service the loan.
- Due Diligence: Like with any investment, doing your due diligence on an NPL or portfolio of NPLs is critical. Here are some key aspects to consider during due diligence:
- Borrower’s Financial Situation: In some cases, you may be able to evaluate the financial condition of the borrowers associated with the NPL. If this is possible, you may be able to review their credit history, income sources, outstanding debts, and other available financial statements. Having this information at hand may allow you to gauge the borrowers’ financial capacity to repay the loan.
- Property Condition: The property is the one tangible item securing the loan. That is why you will want to conduct a thorough examination of the property’s market value, condition, and any legal hurdles you may face. Websites like NestRange.com can help you pull cost effective property valuations for most properties nationwide. They even have the ability to provide you valuations in bulk if you are considering buying a portfolio of NPLs.
- Loan Documentation: You may be able to review the loan documentation in detail before purchasing an NPL. This includes being able to examine the original loan agreement, repayment schedules, and any amendments or modifications made during the loan tenure. Understanding the contractual obligations and legal aspects associated with the NPL is crucial.
- Legal and Regulatory Compliance: As mentioned previously, you’ll want to ensure compliance with the legal and regulatory requirements associated with the NPL purchase. Particularly, any market specific laws and regulations governing the acquisition and management of distressed debt.
- Pricing and Negotiation: When you find an NPL on Hubzu that is of interest, fill out the form to get more information. Once you are contacted by PreREO and have done your thorough due diligence, you can begin to negotiate the purchase price based on the risk profile and potential returns of the NPL or NPL portfolio.
- Loan Management: After the purchase, you will be required to service/manage the loan. You must prepare beforehand and be ready to effectively manage the NPLs you’ve purchased. When you find an NPL on Hubzu, PreREO can help you set up servicing or help you start the foreclosure process. Here are a few things to consider:
- Loan Restructuring and Repayment Negotiations: Are you willing to restructure the loan to maximize the likelihood of recovery? If so, you’ll need to negotiate new loan terms and repayment schedules with the borrower. This can be a difficult process if the borrower is experiencing financial difficulties.
- Legal Actions – Foreclosure: If you are unable to restructure the loan or reach an agreement with the borrower, you may need to take legal action. This can include initiating foreclosure proceedings. The foreclosure process varies by state and all relevant laws and regulations should be followed.
Why Consider Investing in Non-Performing Loans?
- Potentially High Returns: NPLs can potentially offer attractive returns compared to traditional investment options. If handled correctly, NPLs may be able to yield substantial profits.
- Diversification: Investing in NPLs provides diversification for your investment portfolio.
- Economic Opportunities: During economic downturns, the number of non-performing loans on the market tends to increase. In such cases, distressed assets become more abundant and potentially offer greater opportunities for investors.
Non-performing loans can be an interesting venture for an investor looking for high returns and diversification potential. However, as stated numerous times throughout this article, NPLs can be a risky investment as well. It’s always important to keep in mind that there are no guarantees when it comes to investing in real estate. Seeking professional advice and guidance is highly recommended before making an investment decision. That being said, NPLs have the potential to be a very rewarding investment opportunity if you educate yourself, weigh all the pros and cons, and consult a financial advisor that has NPL experience. Visit Hubzu.com to see the NPLs available in your local market.
Disclaimer: This article does not provide financial or investment advice and the information contained in this article should not be taken as such. The information provided is for educational purposes only, and readers are encouraged to consult with a qualified financial advisor before making any investment decisions.