Many investors have taken to buying bank notes to bolster their investment portfolios, and this might be a good opportunity to consider if you’re thinking about diversifying. With the latest real estate market meltdown, financial institutions and mortgage lenders are suffering under the weight of sub-performing and non-performing loans. If you have liquid capital sitting around, here are ten simple steps to buying bank notes.
1- Review the Documents
If you’re going to be buying bank notes, you need to learn how to read the agreement signed between the bank and the borrower. This will give you a large amount of important information, including the amount owed on the note and the repayment terms agreed to in the beginning. If you don’t know the actual outstanding balance, you can’t possibly make an informed decision, and the original documents are the only thing that can prove this.
2- Verify Interest Paid
Just knowing the outstanding balance isn’t sufficient when making investment decisions. It is also a good idea to verify the interest paid before buying bank notes. This tells you whether or not the majority of the balance is principle or interest, and whether or not interest has been paid as the loan has matured. Buying a loan with a balloon payment or an interest-only clause will probably not be good for your investment portfolio.
3- Examine Title History
It is never a good idea to buy a 2nd, 3rd or 4th lien on a bank note, so make sure you research the title history on the mortgage or deed to ensure you are buying a 1st lien. This ensures that you are first in line to collect on the loan when the homeowner decides to sell or when you collect your collateral. Otherwise, you could wind up with nothing even though you’ve technically purchased the bank note.
Liens are not the only concern when buying bank notes. If the homeowners are delinquent in their property taxes or have had their escrow funds impounded, you’ll be liable for those expenses when you purchase the loan. These types of transactions are rarely beneficial to the seller, so make sure you are aware of any tax problems remaining on the loan.
5- Confirm Value
Since you are usually relying on collateral when buying bank notes, make sure you know the fair market value of a property before you purchase the loan. Especially in today’s housing market, you could take a fall if you purchase a home that has significantly decreased in value since purchase, even if you are given a discount on the loan itself.
When buying bank notes, you’re putting your money, reputation and credit at risk, so make sure you do everything in your power to decrease the possibility of losing money. This type of investment is not for people with a low risk tolerance, and can backfire if you don’t do your research before making a decision.
