Performing vs Nonperforming Notes

One of the key distinctions between different notes is weather the note is considered performing or non-performing.

 

Performing

Generally you can think of a note that is performing as one where payments are being made on a regular basis.  Lots of people in the industry use different cutoffs for how late a borrower could be, but it’s generally around 60 days late.  If you buy a note that is said to be performing you should still take a very close look at their payment history.  The risk of a “performing” note where most payments have been made within 5 days of their due date is much less than a note where payments are regularly a full month+ behind.  Nonetheless, if you are looking for only the least risky, most passive investments, the Performing status should be one of the first things you look for.

Non-Performing

As you can probably guess, a non-performing note is any note that is no longer performing.  It could be 61 days late, or there could be no payments made for over a year.  If you’re looking into this type of note, it is definitely riskier, but could still be a worthwhile investment.  For starters, you are more likely to get a significant discount on the purchase price.  You will have to do more due diligence to see if there is a legitimate reason for the delinquency.  Perhaps the borrower lost their job, but has now found a new one and can start catching up.  You could also look at the value of the property to make sure that if a foreclosure is imminent (which is more likely if the note is non-performing), there would still be profits for you on the other side of a foreclosure.  Much more on this in upcoming how-to due diligence articles.