A performing note pays you for waiting. A non-performing note pays you for solving a problem. They are priced by different methods and call for different skills, and being good at one does not make a buyer good at the other.
Both are sold as “notes”, by the same kinds of seller and sometimes in the same pool. This page separates them so you can decide which one you are equipped to own.
The definitions buyers use
Performing means the payer is making payments as the note requires. A careful buyer wants that proven over a stretch of recent months with bank or servicer records, since a seller’s word is not proof.
Non-performing means the payer has stopped. No single industry rule says when a late loan becomes a non-performing one. Each buyer draws the line for themselves, counted in missed payments or days past due.
You will also meet labels for the ground in between. A sub-performing note is one where the payer pays, but late, short or irregularly. A re-performing note is one where the payer defaulted in the past and then started paying again, sometimes after the loan terms were modified.
Always ask which definition a seller is using, because “performing” on a summary sheet can mean twelve clean payments or one payment last month.
Side by side
| Performing | Non-performing | |
|---|---|---|
| Where the return comes from | Scheduled payments, bought at a discount | A workout, a payoff or the property, bought at a deeper discount |
| What drives the price | Yield on the payment stream | Property value, cost and time to resolve |
| How predictable the timing is | Fairly: there is a schedule | Poorly: it depends on the payer, the court and the state |
| Cash needed after purchase | Little | Possibly a lot: legal fees, taxes, insurance, repairs |
| Your main job | Check the file, then monitor | Manage a resolution |
| How it goes wrong | The payer stops and it becomes the other kind | It takes longer and costs more than you allowed for |
How each kind is priced
Performing: price the payments
You are buying payments, so you price payments. Decide the return you need on your money if every payment arrives on time, then discount the remaining payments at that rate, which buyers call the yield on the note. The stronger the payer’s record, the equity and the lien position, the lower the yield a buyer will accept and the higher the price. Add a second test against the property’s value and you have how to price a note as a buyer in outline.
The property is there as a backstop. You check its value and confirm the equity, and if things go to plan you never deal with the property at all.
Non-performing: price the property
With no reliable payments to discount, the method changes. A buyer starts from what the property would sell for and works backward.
- Estimate what the property is worth today, in its present condition.
- List what stands ahead of you: unpaid property taxes, any senior lien, association dues.
- Estimate the cost of each likely resolution: attorney fees, court costs, insurance, securing the property, selling costs.
- Estimate how long each one takes in that state. Time is a cost, because your money earns nothing while it waits.
- Set a price that still leaves an acceptable result if the slow, expensive outcome is the one you get.
The balance owed carries less weight here than a new buyer might expect. A large unpaid balance on a property worth far less is still only worth what the property can deliver.
What a non-performing note demands from you
The first demand is knowledge of one state’s process. Whether a foreclosure goes through a court, how long it runs and what rights the payer keeps afterward all depend on the state, and those rules change. A local attorney is part of the cost of every non-performing deal.
The second is reserves. You may have to pay the property taxes and insurance yourself to protect your lien, and fund legal work for a period nobody can tell you in advance. A buyer who runs out of cash halfway has few good options.
You also need a plan with more than one branch. The payer may respond and want to keep the home. They may want to leave. They may file bankruptcy, which generally pauses collection while the court sorts things out. Work out your exit strategy for a non-performing note on each of those branches before you bid, since the price has to survive whichever one you get.
Last, there are rules on how you treat the payer. Collecting on a defaulted consumer loan is regulated, and the rules vary by state and by the kind of loan. Servicers that specialize in defaulted loans exist so that contact with the payer is handled properly, and using one is worth pricing in.
The risk that performing buyers forget
A performing note is performing only until the month it is not. Any payer can lose a job or a spouse, and the buyer then owns a non-performing note they did not choose. That is why the property and the paperwork, which the investor guide counts among the things that decide a note’s quality, deserve full attention even when the payment record is spotless.
Before closing, ask yourself whether you would be content to own this lien on this property at this price if the payer stopped next month. A “no” means the price is too high for the collateral, whatever yield it shows.
The middle ground
Re-performing notes tempt buyers because they are still paying, yet their history lets a buyer ask for a higher yield than a clean note would support. Look at how long the payer has been back on schedule and why they fell behind before. A temporary cause that has passed, such as a job loss followed by a new job, reads differently from a payment the household could never really afford. A modification that lowered the payment to something sustainable is a better sign than a payer who caught up once under pressure.
Which one fits you
Performing notes suit a buyer who wants scheduled income, can read a file, and would rather pay more for less uncertainty. Non-performing notes suit a buyer who has spare time, an attorney in the state, cash in reserve and experience with distressed property.
Neither is the better asset in general, and the fair way to choose is to picture the worst day each could give you and ask what you would do. The same test settles whether a first note should be performing or non-performing: it comes down to which worst day you already have the reserves and the attorney for.
Telling a source which kind you buy
Holders bring us both: paying notes from seller-financed sales, and notes where the payer has slowed or stopped and the holder wants out. A source can only match you if your criteria say which kind you take, where you draw the line between them and which states you will work in. Put those answers in writing when you join the buyer list, in terms as exact as “performing only, twelve verified payments, first liens”. A file that falls on the wrong side of your line is then one you never have to read.
Related questions
What is a sub-performing note?
It is a note where the payer still pays, but not as agreed: payments come late, short or with gaps. Buyers price it somewhere between a clean performing note and a defaulted one, depending on the pattern and the equity in the property.
Can a non-performing note become performing again?
Yes. If the payer catches up, or the owner and payer agree new terms that the payer then keeps to, the note is called re-performing. Before treating it as a performing note, a buyer will want to see a run of payments made under the new terms.
Are non-performing notes cheaper because they are better deals?
They are cheaper because the outcome is uncertain and resolving a default costs time and money. The lower price is compensation for that. Whether a particular one is a good purchase depends on the property, the state and the costs, not on the size of the discount.