WHAT IS A “NON-PERFORMING LOAN”? A Non Performing Loan (sometimes referred to as an NPN) is a loan that is no longer paying as agreed.
You may not realize it, but you probably see real world examples of a non-performing loan every day. The news is full of stories about the “foreclosure crisis”. Imbedded in crisis is opportunity. And, NPN investments can represent one of the best opportunities available today.
WHY SHOULD I CONSIDER NON-PERFORMING LOAN INVESTMENTS? Lenders who are selling NPNs are selling at modest to large discounts. For the savvy Real Estate Operator who knows how to turn distressed assets into performing assets, NPN investments represent a fabulous opportunity. And the risk is surprisingly low.
HOW DO I MAKE MONEY WITH A NON-PERFORMING LOAN? Profits can be made in a variety of ways. There are two basic programs:
- Negotiate with the Borrower to restructure the loan. Once the loan is performing, it can either be sold for a profit or held for high returns
- Recover the property through foreclosure, then either sell it at a profit or hold it for long term investment.
Examples of Non-Performing Loan investments:
1. Debt Re-Structure.
THE PROBLEM: A Developer had a residential project that was not selling quickly. If the prices could be lowered, the homes would sell faster. The bank that provided the development loan was in trouble, and needed cash. The bank agreed to “discount” the loan if it could be paid quickly. If the Developer could lower the price of the homes, they would sell faster.
THE SOLUTION: The loan was purchased at a “discount”. The Developer lowered the price of the homes which made the homes sell faster. The buyers of the homes got a lower price (actually, a bargain even in today’s world). The Real Estate Operator who structured and managed the transaction made a profit. The Investor earned a high return, well secured by Real Estate.
2. HOLD FOR INVESTMENT.
THE PROBLEM: A golf course owner ran into financial difficulty and could no longer make the payments on the loan. The property was not really suited for a golf course, but had many redevelopment possibilities. With more cash invested and a dedicated development team, the property could be redeveloped, yielding substantial profits.
THE SOLUTION: Through months of negotiation, the bank agreed to sell the loan for approx. 55 cents on the dollar. The property was foreclosed. The Real Estate Operator has mobilized a development team and is processing applications to develop the property, anticipating the property to be sold at a tremendous profit. The bank received cash for a loan that was not paying. The Operator expects to make a great profit. The Investor is earning a high return, short term, and is well secured by Real Estate.