Note
Investing

Types of notes

• First-lien performing (PN). Borrower current on payments, priced 70–95% of UPB (Unpaid Principal Balance) depending on note rate, remaining term, borrower credit, and LTV.
• First-lien non-performing (NPN). Borrower 90+ days delinquent. Priced 20–50% of UPB based on collateral value and workout timeline.
• Junior lien (2nd mortgage, HELOC, PACE). Subordinate to first lien, priced at deep discount — performing seconds 30–60% of UPB, non-performing seconds often pennies. Workout requires navigating the first lien holder.
• Re-performing (RPN). Previously non-performing, now current after modification. Priced 60–80% of UPB depending on seasoning of payment history.
• Private seller-financed notes. Not institutional. Retail investor originated at sale. Variable quality.

Where to buy

• Paperstac (online marketplace, transparent pricing)
• FCI Exchange
• Note Investor Pro
• NoteTrader Exchange
• Direct from community banks (OREO purging)
• FDIC auctions (bank-failure portfolios)
• Hedge fund secondary (off-market, tape of 50–500 notes)
• Fannie/Freddie bulk sales (institutional-only minimum)

Pricing varies by source. Paperstac lists one-off notes typically at higher prices than hedge-fund bulk tapes. Volume operators build relationships with community bank SVPs of credit, who often sell delinquent notes at 25–35% of UPB to clear OREO risk before regulatory exam.

Due diligence

• Title report. Confirm lien position, identify senior and junior liens, tax liens, mechanic’s liens, HOA. Endorsement ALTA 9 for comprehensive coverage.
• BPO (Broker Price Opinion). Drive-by or interior valuation by licensed agent. $75–150/property. Confirms collateral coverage.
• Pay history. Full payment record from prior servicer. Identifies cure pattern, last payment date, reinstatement attempts.
• Original note and mortgage. You need both. Lost-note affidavits are weak; recorded assignment of mortgage chain must be complete.
• Borrower status. Occupancy verification, credit pull (with FCRA permissible purpose), bankruptcy filing check.
• Property occupancy. Owner-occupied vs. abandoned vs. tenant-occupied. Affects workout strategy and timeline.

Servicing

You must use a licensed servicer in most states. Attempting to service in-house without license is a CFPB and state regulator target. Leading servicers:

• Madison Management Services
• FCI Lender Services
• Allied Servicing
• SN Servicing
• Specialized Loan Servicing

Servicer costs $10–30/month per note for performing, $30–75/month for NPN in active workout. They handle payment collection, escrow, default notices, borrower communication, foreclosure coordination. Servicer quality directly determines workout outcomes — bad servicer delays foreclosure 6+ months.

Workout strategies (NPN)

1. Reinstatement. Borrower pays all past-due + fees, brings loan current. Cleanest outcome.
2. Loan modification. Capitalize arrears, reduce rate, extend term. Creates re-performing note salable at 60–80% of UPB.
3. Forbearance. Temporary payment reduction/suspension, repaid later. Short-term hardship bridge.
4. Cash-for-keys / deed-in-lieu. Pay borrower $3,000–10,000 to vacate and sign deed. 30–60 days vs 6–18 months of foreclosure.
5. Short sale. Borrower sells property for less than UPB, you accept payoff less than UPB. Borrower keeps credit less damaged.
6. Foreclosure to REO. Force sale via judicial or non-judicial foreclosure, take the property. Sell as REO or rent. Most expensive and time-consuming path.

Foreclosure timelines — state matters

• Non-judicial: CA 120 days, TX 60 days, AZ 90 days, GA 45 days
• Judicial: FL 6–8 months, OH 6–12 months, IL 12–18 months, NJ 18–36 months, NY 24–48 months
• Redemption periods: AL 1 year, AK 3 months, MI 6 months, TN 2 years (some counties)

Expected workout IRR depends heavily on state. Non-judicial states produce 20–30% IRRs on NPN. Judicial states with long timelines produce 10–15% IRRs unless discount at purchase compensates.

Compliance

• Dodd-Frank SAFE Act. If you originate seller-financed notes on primary residences, RMLO (Residential Mortgage Loan Originator) licensing required. Safe harbors: 3 properties/year (Dodd-Frank), 5 properties/year (SAFE Act), but they don’t fully overlap.
• Ability to Repay (ATR). §1026.43 for residential mortgages. Documents borrower capacity. Applies to originators, not secondary buyers.
• CFPB Reg X. Servicing rules — single point of contact, loss mitigation procedures, error resolution. Violation triggers CFPB enforcement or private right of action.
• State licensing. Some states (CA, NY, FL, MA) require note purchasers to hold CA Finance Lenders license, NY Money Transmitter equivalent, or similar.

Return expectations

• Performing notes. 6–10% yield-to-maturity, fixed income behavior. Suitable for IRAs, passive income portfolios.
• NPN workouts. 18–25% IRR when underwritten correctly, 5–12% IRR on difficult states or weak collateral.
• RPN creation. Buy NPN at 30% UPB, modify, season 12 months, sell RPN at 70% UPB. 30–50% annualized on successful workouts.

Common pitfalls

• Chain of assignment broken. Missing or defective assignment of mortgage. Can block foreclosure in judicial states. Demand complete, recorded chain at purchase.
• Borrower bankruptcy. Automatic stay 11 USC §362 halts foreclosure. Chapter 13 cram-down on investment property allowed. Budget 6–18 months additional timeline.
• Title defects post-purchase. Mechanic’s lien or tax lien discovered during workout that wasn’t caught in due diligence. Title insurance endorsement at purchase helps.
• Property destroyed. Fire, flood, abandonment vandalism. Force-placed insurance post-default protects collateral but is expensive; budget $1,500–3,000/year.
• Property occupied but borrower MIA. Tenant in place, borrower disappeared. Navigate landlord-tenant law — often can’t evict tenant without foreclosure first.
• State consumer protection. NY, CA, MA, IL have aggressive consumer protection statutes and judicial hostility to note investors. Price state risk into offer.
• Servicer change mid-workout. Transferring servicing mid-foreclosure delays 30–90 days and re-starts borrower notice clocks.