Non-Performing Loans Present An Attractive Investment Option

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Due to current economic conditions, lenders have an unprecedented number of non-performing loans on their books. Investors can purchase these non-performing notes at discounts as high as 60%, making them attractive investments when handled properly. Bob Bright has written an introduction to purchasing non-performing notes that can help guide you to the best investment options.

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Bob Bright, a principle for the firm Genesis Capital and expert in real estate investment, has released an article that explains the pros and cons of purchasing non-performing loans as an investment. As an attorney involved in the purchase and sales of properties and the underlying debts, Mr. Bright is able to provide us with unique insights into the opportunities presented by the current explosion in non-performing notes.

The current glut of non-performing notes is an offshoot of the bursting of the real estate bubble in 2007. Traditionally, lenders would attempt to resolve the non-performance with the borrower. If a resolution could not be reached, the lender would pursue foreclosure to recover their capital.

In today’s reality, there are far too many non-performing loans for lenders to keep up with through traditional methods. This has led the lenders to begin selling off the non-performing notes. It is a simple and effective method for them to reduce their growing backlog of non-performing loans.

Bob Bright, the author of the article had this to say; “The growing trend for resolution is the direct sale of the non-performing note where the lender simply decides to let someone else deal with the problem. The lender sells the note at a discount to a buyer that is either interested in the note, or interested in acquiring the underlying collateral. This process allows the lender to quickly recover its capital without the time and expense of foreclosure and subsequent marketing and sale of the property.”

Mr. Bright also warns of the potential downfalls associated with these types of investments. Because the buyer is assuming all the rights and responsibilities of the lender there are several risks involved. These risks include, but may not be limited to:

  •     The loan documentation history may be flawed or incomplete
  •     The borrower may not cooperate in a modification or foreclosure
  •     It may take longer than expected to recoup the investment

The article goes on to discuss the necessity of due diligence on the part of the buyer. Due diligence in these investments is not limited to the property itself, but should also include analysis of the borrower. It also needs to include close inspection of the loan documents to ensure they are complete.

Many buyers find non-performing notes to be an attractive investment due to the deep discount versus the perceived value of the property. “In fact, it is not uncommon to see non-performing notes trade at a discount of up to 60% or more off of the unpaid balance. It should be remembered, however, that this discount is a reflection of the note’s distressed condition,” said Mr. Bright.

While non-performing notes can provide a great investment opportunity, they do come with risks. No buyer should assume that this is a shortcut to acquiring an underlying asset. If due diligence is performed and all of the issues surrounding the non-performance of the loan are understood, it is possible to locate loans that justify the risk of investment.

About Bob Bright:
Bob Bright is a principal and General Counsel for Genesis Capital, a leading provider of premiere off market assets and notes. Bob is also a principal of Bridgewaters and represents clients in the US and Internationally in the acquisition, disposition and management of commercial assets and investment properties. This includes the buying and selling of distressed debt. Bob is dual qualified as a California attorney and a solicitor of England and Wales.

About Genesis Capital:
Genesis Capital is a nationwide network of seasoned commercial real estate and financial professionals that believe in the potential of today’s market. Our members source assets directly from banks, servicers, lenders and private clients for off market transactions.

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