EP58 Distressed Note Buying 101: How Solo Investors Profit by Purchasing Non-Performing Mortgages

Episode Description:

Non-performing notes let savvy investors acquire property or create cash flow without ever swinging a hammer. Troy explains how solo operators can find discounted mortgage notes, evaluate risk, navigate the workout or foreclosure process, and turn someone else’s bad loan into a profitable flip or rental — all with creative financing at the core.

Speakers:
Host: Troy Walker
Guest: Natalie Brooks

Transcript (Speaker-Formatted)

Troy: Hey everyone, welcome to Cash4Flippers! I’m your host Troy Walker, and today we are getting into something that most solo investors have never even considered — buying distressed mortgages and profiting from non-performing notes.

Troy: Joining me today is Natalie Brooks, a note investor and creative financing strategist who has built a portfolio by purchasing non-performing mortgages at deep discounts. Natalie, really glad you’re here.

Natalie: Thanks Troy, excited to be here. And I’ll say this upfront — note buying is one of the most underrated strategies in real estate, especially for solo investors who are tired of competing for the same flip properties everyone else is chasing.

Troy: That’s exactly why I wanted to bring this topic to the show. So let’s just start at the beginning for listeners who have never heard the term “non-performing note.” What are we actually talking about?

Natalie: So a mortgage note is basically the legal document that says a borrower owes money to a lender. When that borrower stops making payments — typically ninety days or more past due — that loan becomes a non-performing note, or an NPN. The bank or lender now has a problem asset sitting on their books, and they want it gone.

Troy: And that’s where the investor comes in.

Natalie: Exactly. Banks and hedge funds will sell these non-performing notes at a significant discount to get them off their balance sheet. So instead of buying the house itself, you’re buying the debt. You become the bank.

Troy: That’s a mind shift right there. You’re not buying a property, you’re buying the right to collect on a loan or take the property if it goes sideways.

Natalie: That’s it in a nutshell. And what makes it powerful is you can buy that note at maybe forty or fifty cents on the dollar compared to the actual property value. So your basis is low, which gives you multiple exit strategies.

Troy: Talk to me about those exit strategies because I think that’s where solo investors start to see the opportunity.

Natalie: Sure. So when you buy a non-performing note, you have a few paths. First, you can work out a loan modification with the borrower — reduce their rate, extend the term, get them performing again. Now you’ve got a performing note you can hold for cash flow or sell at a premium. Second, you can do a deed in lieu of foreclosure, where the borrower voluntarily hands the property back to you. Third, if none of that works, you foreclose and take the property. At that point you own real estate at a deep discount and you flip it or rent it.

Troy: So you’re not locked into one outcome. That’s actually a huge advantage over a traditional flip where if the deal goes sideways, you’re kind of stuck.

Natalie: Exactly. The flexibility is what I love about it. You’re underwriting the note with multiple outcomes in mind, and any of those outcomes can be profitable if you bought it right.

Troy: Okay so how does a solo investor actually find these notes? Because I’m guessing they’re not on the MLS.

Natalie: They’re definitely not on the MLS. The main sources are note brokers, which is probably the easiest starting point. There are also online note marketplaces where pools and individual notes get listed. You can also go direct to smaller community banks and credit unions — they don’t always have a system for offloading bad paper, so a direct conversation can open doors. And then there’s networking with other note investors, because deals get passed around constantly.

Troy: Community banks are interesting. I feel like a lot of my listeners already have relationships with local banks because they’re borrowing for flips. This is almost a flip of that dynamic.

Natalie: It really is. And smaller banks are often more willing to sell one or two notes at a time rather than requiring you to buy a massive pool. That makes it very accessible for the solo operator who doesn’t have millions to deploy.

Troy: Let’s talk money. What does it actually cost to get into this, and how does someone figure out what to pay for a note?

Natalie: The underwriting process is called calculating your maximum allowable offer, similar to how you’d calculate MAO on a flip. You look at the unpaid principal balance on the note, the current value of the property — always get a BPO, that’s a broker price opinion, or a full appraisal — and you work backward from your exit strategy. If you plan to re-perform the note and sell it, your numbers look different than if you plan to foreclose and flip.

Troy: So you’re essentially doing a deal analysis similar to a flip, just with different variables.

Natalie: Very similar mindset. You want to buy at a price where every realistic outcome still makes you money. A general rule of thumb is to try to buy at sixty-five percent or less of the after-repair value of the underlying property, accounting for your anticipated costs to resolve the note.

Troy: And what kind of costs are we talking about beyond the purchase price?

Natalie: You’ve got servicing — you need a licensed loan servicer to handle all borrower communication and payment processing, you can’t do that yourself legally. That’s typically a small monthly fee. Then there’s potential legal fees if you go to foreclosure, which varies a lot by state. And you might have carrying costs if you end up owning the property at the end. So you have to factor all of that in.

Troy: The loan servicer piece is something I’ve never heard people talk about. That’s a compliance thing, not just a convenience thing.

Natalie: One hundred percent. Federal regulations under the CFPB require that borrower-facing collections and communications are handled by licensed servicers. You cannot self-service a note you bought as an investor. That’s one of the non-negotiables in this business.

Troy: Good to know. What about the foreclosure timeline? That’s always a concern for investors because a long foreclosure state can kill your returns.

Natalie: This is where your market selection matters. Judicial foreclosure states like New York or New Jersey can take years. Non-judicial states like Texas or Georgia can move in a matter of months. Most note investors are very selective about geography for exactly this reason. When you’re starting out, stick to non-judicial states where you have more control over the timeline.

Troy: Smart. Keep it manageable until you know what you’re doing.

Natalie: Right. Start with one note, ideally in a non-judicial state, on a property type you understand — single family is usually the best starting point — and learn the process from start to finish.

Troy: I love that. One note, single family, non-judicial state. That’s a real beginner framework right there.

Natalie: And document everything as you go. The note business is very paper-heavy. The chain of title on that note has to be clean, the assignment of mortgage has to be recorded properly. If you have documentation gaps, you can have serious problems trying to foreclose.

Troy: That’s a great heads up. This is definitely a strategy where you’re leaning on your attorney probably more than in a typical flip.

Natalie: Absolutely. A good real estate attorney who understands note law in your target state is not optional. It’s part of your team.

Troy: Alright, let me bring this home for the listener. Here’s what I took away from this conversation. Number one, non-performing notes are bought at a discount from banks and lenders, and you become the lender when you buy in. Number two, you have multiple exit strategies — re-perform the note, deed in lieu, or foreclose and flip — which gives you real flexibility. Number three, underwrite the deal like a flip, targeting sixty-five percent or less of ARV with all resolution costs baked in. Number four, you must use a licensed loan servicer, that’s not optional. And number five, start in a non-judicial foreclosure state with a single family note to keep the learning curve manageable.

Troy: Natalie, if someone’s listening to this right now and they want to take one concrete step in the next twenty-four hours, what should that be?

Natalie: Pull up the PACER system online — that’s the federal court database — and search for foreclosure filings in a county you’re interested in. Start reading through actual case filings on non-performing notes. You’ll start to understand the legal language, the timeline, and the types of properties that end up in this process. It costs almost nothing and it’ll teach you more than any course will in an afternoon.

Troy: That is a perfect action step — free, practical, and you’re learning from real deals. Natalie, thank you so much for breaking this down. This is exactly the kind of strategy the Cash4Flippers audience needs to hear. And to everyone listening, if this episode gave you something to think about, make sure you subscribe or follow wherever you get your podcasts so you never miss an episode. We’ll see you next time on Cash4Flippers.