Non-Performing loans are loans where the borrower is at least 90 days past due in making a payment and not likely to get caught up or make additional payments on the loan. For banks, these loans have traditionally been a problem because they represent a higher default rate and lowers the profit margin of the bank on its lending practices. Of course, lending institutions in general always account for such losses and write them into their interest rates to ensure that their total lending portfolios are in the positive regarding returns. Banks have learned to sell these loans on a secondary market at a discount allowing the assignee the right to collect on the loan, if possible.
Non-Performing loans can be a problem for any type of lender, not just banks. That includes real estate crowdfunding platforms. Such loans may be a bane to the lender, but they represent a unique opportunity for investors.
The Risks of Financing Non-Performing Loans
One of the most obvious risks of financing Non-Performing loans is the failure to collect. For the original lender, selling the loan at a discount can get it off its books, and the lender can recoup some of its investment without taking a total loss. However, the loan’s purchaser then assumes the burden of collection, which can be costly and is inherently risky.
Not only is it risky to purchase a Non-Performing loan in terms of its cost to the buyer, but there are also costs associated with collecting. It can take considerable resources to chase down a borrower and convince that borrower to pay off a loan.
In terms of financing real estate Non-Performing loans, if the property is a multifamily property, the loan purchaser could be getting a property where the majority of tenants aren’t paying their rent. In that case, not only is the loan Non-Performing, but the underlying asset is Non-Performing and represents a huge liability.
Rewards Associated With Buying Real Estate Non-Performing Loans
While investing in Non-Performing loans is inherently risky, there are rewards associated with these loans that are unique to the Non-Performing loan market as a whole.
- First, Non-Performing loans can be purchased at huge discounts. Let’s say a loan of $100,000 was made but only $25,000 has been paid back. That $75,000 in unpaid principal is a huge liability to the lending institution. An investor that buys that loan at 50% is now sitting on a potential substantial return on investment.
- Investing in Non-Performing loans puts you in the first lien position. That means you get paid first should the borrower decide to continue making payments.
- When you buy a Non-Performing real estate loan, you control the underlying asset. In other words, if you never receive a payment for the discounted loan you purchased, you can foreclose on and sell the property for its true value recouping your investment and a nice return in the process.
- As financier of a Non-Performing loan, you have the option of renegotiating with the borrower and setting new terms on the loan. You can offer better terms to the borrower based on their current financial situation and turn your investment into recurring passive income.
Non-Performing real estate loans are a huge opportunity for investors who are serious about turning a discounted asset into a positive ROI and potentially a passive income that will keep your returns flowing in for years to come.
Here at Sharestates we offer Non-Performing loans as one of our programs. Click on the button below and read about what we offer.