What You Need to Know About Performing Notes
When a borrower makes regular, timely payments on a mortgage as outlined in the loan terms, the associated note is in good standing. It’s classified as a performing note.
Performing notes are owned by banks, mortgage companies, and investment firms – and by investors who provide seller-backed financing to borrowers.
The status of a performing note is fully backed by evidence of timely payments, usually in the form of canceled checks and bank statements.
Why Do Investors Choose Performing Notes?
Performing notes are a popular investment option. They’re often sold at a moderate discount from the perceived real value of the physical property they’re attached to. They offer a long-term, collateral-backed investment that’s not affected by day-to-day volatility in the stock market.
Performing notes enjoy limited sensitivity to changes in interest rates. Best of all, they provide fixed monthly income through principal and interest payments.
Even when a performing note is paid off by a borrower, through a refinancing or sale, an investor can still realize income from the “collateral gap.” The collateral gap is the difference between the discounted price an investor paid for a note and the actual full value of a property.
Performing notes are easy to manage. Unlike being a landlord who has to deal with the hassle of maintenance or tenant issues, investing in notes is largely paper-based. So it’s feasible to invest in multiple notes without much additional work.
Finally, note investing offers versatility in terms of realizing a return on investment. Note holders can buy and sell partials.
To do so, they arrange with other investors to buy or sell part of a note, freeing up capital to make more investments. They can borrow against the value of the note, or sell the note to another investor.
What Risks Do You Take on by Investing in a Performing Note?
Like any investment, performing notes come with risks.
It’s possible that a borrower who’s been in good standing will encounter financial difficulty and miss a payment. That’s when the noteholder needs to work with the borrower to:
- Arrange a schedule to bring the payments up to date.
- Modify the loan.
- Or, in the worst case, initiate foreclosure proceedings.
Another risk arises when a borrower refinances the loan shortly after an investor purchases the associated note. Since investment income is realized from monthly interest payments, the shorter the time you own a note, the lower the potential return on investment.
To mitigate risks, note investors should conduct thorough due diligence on a note before buying, such as:
- Examine the payment history and creditworthiness of the borrower.
- Understand the condition of the property.
- Gain awareness of any issues with the underlying paperwork.
- Verify appropriate insurance coverage.
- Assess whether the neighborhood is declining or growing.
Why Do We Invest in Performing Notes?
Beacon Enterprises LLC buys performing notes, from institutional investors and “mom and pop” sellers.
Our experience with investing in performing notes and ability to purchase a large number of notes help us mitigate risks.
We continually reinvest in notes to realize returns that enable us to stabilize affordable U.S. neighborhoods without displacing deserving residents.
