How a Note is created:
When a real estate property is purchased with a loan, two major documents need to be signed, promissory note that states name of the borrower and loan terms, very similar to an IOU, and a mortgage that imposes a lien on the deed of the property to secure the note.
If the borrower doesn’t make his payments on time, that note becomes a non-performing note.
We buy these non-performing notes from financial institutions at a very big discount.
Once we buy the note, the borrower owes us the unpaid principal balance of their loan and the bank is out of the equation. At this point, we try to make the borrower re-perform on their loan. We find out what is the reason they stopped performing, and work with them to try to get them to re-perform.
If we get them to re-perform, we can sell as a performing note at a much higher price and we make a profit. If we cannot work with the borrower because he can’t make payments we try to get them to sign a deed in lieu (cash for keys) and relief them of the debt or we go into foreclosure. Once we control the property, we can fix and flip it, we can fix and rent it, we can rent it as-is, or sell it as it is depending on the property condition.
This is the basics on how investing in non-performing notes works.