Once you purchase a mortgage note, you own it. Literally, you become the bank. If you have purchased a non-performing note, as most of those we purchase are, your next step is to convert the note into a high-yield passive investment. In most cases, we offer forbearance (a temporary payment suspension) and then work with the borrower to modify the mortgage to an amount the borrower can afford to pay. (We often work with third-party credit counselor Polaris to achieve a win-win result, and I’ll tell you more about how that works in another blog post.) Once the borrower makes timely payments for 12 months, you have the option to sell the note as a re-performing note.
Many investors feel that notes are among the best investments because returns are typically higher than from traditional investments and are backed by collateral, the real property. The two most similar investment comparisons to notes are tax liens and the real property itself.
With tax liens, the investor is in a safer lien position because property taxes are paid ahead of mortgages in a default or foreclosure. While investing in a tax lien may seem promising, the downside is no cash flow or income while the investor is waiting to get repaid. It is also extremely rare that an investor would take over control of the property, unlike note investing.
If you own the real estate itself, you have an asset that might appreciate. However, “phantom appreciation” can sometimes occur for notes purchased at a discount because a note’s value directly correlate to the property’s values. When the value of the real estate goes up, the value of the note increases. To read more about comparisons of owning notes or real property, read Number 1.