This is perhaps the most advanced form of real estate investing you can try out, hence why it’s placed as one of the last strategies. This is a very much hands-on investment strategy and it does take a great deal of research and knowledge in order to be profitable.
This is a high-risk investment that can take years to show the reward. You’ll also need to be prepared to go through the foreclosure process in order to get your return.
- Up-Front Investment: Varies by situation. Usually large.
- On-Going Investment: Just lots of time.
- Return on investment: Could take many years and many hoops.
- Best for: Advanced real estate investors with time and money to spare.
How It Works
If you buy a real estate note, you are buying a real estate mortgage. However, the mortgage you’re buying is “non-performing”. In other words, you are buying a bad loan. Banks sell these notes at a deep discount, which means it could pay off big for you.
Let’s say that a homeowner owes $100,000 on their mortgage. They haven’t paid in six months, so the bank is trying to unload this debt for less than its face value. The difference between how much you collect when it pays out and how much you paid to acquire the note will equate to your profit (or loss).
Obviously, as a very high risk investment, the reward can also be very high. Say that you buy that $100,000 note for just $70,000. The potential profit is $30,000 once settled, which usually requires going through foreclosure. Buy purchasing the note, you become the new lender on the property, allowing you to foreclose and sell the property.
If the property is worth $100,000 or more on the open market, you’ll get your profit. But, if it turns out the property is only worth $50,000, you’re going to end up taking a loss ($20,000, to be exact).
The profit potential is tremendous but, of course, the potential loss is just as dramatic, hence why this method is best left to the professionals who have room to gamble.
The biggest pro with buying real estate notes is that you will get to potentially make a large profit. By buying the note for less than its face value, you have the potential to earn a lot so long as the property sells for more than you paid for it.
The risk is the biggest con with buying real estate notes, and you also have to consider the time. Settling up with the owner or going through the foreclosure process are both very time-consuming processes and they can take years to unfold.
Even if you foreclose in a matter of months, the time-consuming part of the process is waiting on the property to sell so that you can collect your profit. And, of course, that profit may not come if the property turns out to be worth less than you paid for the note.
Buying real estate notes has the chance for big profits, but you need to know the property you’re buying and be able to gauge its selling price on the open market. While the bank may discount the note at its face value, this is not representative of the property’s current value.
You also need to plan to devote a good deal of time to settling up and selling the property. Expect your money to be tied up for many years and keep in mind that you are not promised a profitable return. You will also need to put down many thousands of dollars up front to purchase the note and it’s best to pay for professional advice.
However, given that you are in the financial situation to make these considerations carefully, buying real estate notes is an advanced method and something you should look into or strive towards in the future.