Frequently Asked Questions
- Secured: if the borrower fails to repay a debt, then the lender has the right to seize a collateral (such as a house).
- Unsecured: no collateral is attached to the loan.
Performing note: the borrower is making payments on-time as outlined in their loan agreement.
Non-performing note: the borrower is at least 90 days behind on their regular payments.
Re-performing note: the borrower resumes regular payment after a 90-day delinquency. After 12 months of timely payments, the note is once again classified as Performing.
A mortgage involves two parties: the borrower and the lender.
On the other hand, a trust deed involves at least three parties: the borrower, the lender and a trustee who holds the legal title for the property.
Ultimately, both a mortgage and a trust deed serve the same purpose, which is to secure a real estate transaction. Some States use a mortgage while other use a trust deed.
While there are different reasons why a bank chooses to sell a mortgage, the most common is that the borrower is delinquent on their payments (aka a non-performing note).
Banks typically place these liabilities into a bundle or package, and sell them at a deep discount.
In other instances, banks may also choose to sell performing notes. This usually happens after the bank has collected interest payments for many years and they now want to use their capital for other purposes. These performing notes are often sold to other banks, mortgage lenders or investment firms at a moderate discount.
From a practical standpoint, there is no significant difference between mortgages. The terms 1st Mortgage and 2nd Mortgage describe when the physical mortgage document was recorded in the County Recorder’s office.
When a mortgage document is entered into the county records and there are no other outstanding/unpaid mortgages in the country records, this is called a 1st Mortgage.
Subsequent mortgages generated after this are called 2nd and 3rd mortgages, etc.
If a property is foreclosed on, then the 1st mortgage gets paid off first. Any funds that are left over are then applied toward the other mortgage(s) on file, such as a 2nd mortgage.
From my perspective, notes are more secure than investing in stocks or having ownership of physical property.
The notes in my portfolio are secured by solid collateral. You have access to these notes at a discounted price—lower than the unpaid balance for the notes—which gives a certain amount of buffer that lowers the risk of loss.
When paying for a note, I recommend never paying more than the market price of the property that serves as collateral for said note.
Note investors often get money from equity lines of credit on properties, cash savings or retirement accounts (such as IRAs).
Sometimes, people also choose to create a business partnership with friends or family, in order to pool their resources to purchase notes.
By investing in secured, performing notes, you receive interest payments every month.
Notes are on par with physical property when it comes to the ROI.
However, where notes outshine physical property is in the minimal amount of overhead and stress. With notes you don’t have to worry about tenants, termites, repairs and other responsibilities associated with being a landlord.
There are several courses of action that are possible.
In general, the first step is to review your financial goals and discuss the borrower’s available options.
Based on the outcome of that discussion, I will help you make an action plan to reach those goals.
So, in some cases, you might reach out to the borrower and negotiate an adjustment of the terms of the note (this will help them stay in the property). In other cases, you can initiate a foreclosure and work with a realtor to sell the property.
Throughout the process, I’ll provide regular updates so that you know exactly where things stand.
Each State, and sometimes each county in a State, has specific laws that spell out the rights of a note holder, as well as how to proceed with foreclosures.
To ensure that everything is done correctly, I work with a network of foreclosure attorneys around the country who understand the nuances of these laws.
So, if your borrower fails to pay and you decide to move forward with a foreclosure, myself and my network of attorneys will handle everything for you.
Please keep in mind that the foreclosure process can take anywhere from 60 days to 2 years, depending on the State and county that the property is located in.
Also, foreclosure costs generally cost about $1,500 – $5,000. Once again, the variance has to do with the rules of each State and county.
NOTE: foreclosure is just one course of action when a borrower fails to pay. I will go over all your options with you so that you can move forward with the choice that works best for you.
To get the ball rolling, please schedule an initial discovery session with me via the Work With Me menu.
This will be a private, 30-minute consultation where I can get a better understanding of your needs and you can ask any questions that you have.