6 Things to Consider Before Purchasing Non-Performing Notes

If you told me five years ago that the selling of distressed notes by banks would become a virtual retail industry, I wouldn’t have believed it. Yet here we are, and business is booming. As an example of the frenzy, I recently had three different clients bidding on the same note. Pretty amazing.

In multifamily alone, there are billions of dollars worth of outstanding, distressed debt. Whereas a few years ago, banks would have been more inclined to foreclose on a non-performing commercial real estate property, they are now choosing to sell the note. Why? Banks are in the business of lending money, not owning and operating real estate. By selling the note rather than going through the expensive and sometimes drawn out process of foreclosing, a bank stays out of the chain of title, doesn’t become liable for the property’s environmental conditions and doesn’t have to worry about the time—and expense—of other property management and ownership issues. Add in the cost and effort of marketing the property to potential buyers following the foreclosure and the numerous existing properties already being carried on their books, and you can see why banks were looking for an alternative to foreclosures. Note selling has provided that alternative avenue.

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