Advantages of non-performing notes over REOs:

1.     No property ownership headaches: when the ownership of notes is transferred the underlying property ownership is not transferred, so the new owner of the notes won't need to pay title insurance, state and local transfer fees, property tax, and property insurance. The new owners of REOs would likely need to pay all of these -- the property tax and property insurance would be prorated for the duration of ownership, but the title insurance and transfer fees generally would need to be paid in total.

2. There is a lot more inventory: there are just over 100 million homes in the US with approximately 5% in foreclosure at this time, or 5 million. There are more than 20 million nonperforming notes, more than 4 times the number of REOs.

3. Easier way to acquire REO inventory: this can be the best way to acquire new REO inventory, which can be quite difficult to obtain. Since there is a lot more inventory of non-performing notes than REOs then the pricing for non-performing notes can be more attractive. With the number of REO buyers entering the market every month this might be the simplest and most cost-effective method to acquire pre-REO properties.

4. The broker chains are much smaller: it is not nearly as difficult to get direct to note holders as it is to get direct to REO holders since many note holders are private individuals and institutions whereas most REO owners are banks and hedge funds It is also a lot easier to get direct to note buyers than it is to get direct to REO buyers.

5. Notes are much easier to flip since the buyer doesn't have the additional costs associated with point #1 above. There are also many fewer federal and an king restrictions placed on the flipping process.

6. The properties are generally not vacant, so there are fewer worries about vandalism and property maintenance.

7. There are more exit strategies with non-performing notes than with REOs. The holder of nonperforming notes might try to turn some of the notes into performing notes by negotiating new payment terms with the note payors. They could foreclose or flip any notes that they can't convert to performing. They could keep the newly performing notes for their cash flow or they could sell this set of notes for significantly more than they purchased since now the notes have been converted to performing. Conversion rates from non-performing to performing range from 10% to 25% of the notes depending on many factors (credit score, length of delinquency, equity, new payment terms, negotiating skills, etc).

Advantages of performing notes over non-performing notes and over REOs:

1. They are cash flowing: the investor makes money every month. The effective yield can be computed at the time of purchase with an amortization calculator, but the discount given by the seller raises the overall yield above the face value rate of the note, often significantly so.

2. Regional diversification becomes truly realized with a nationwide performing note portfolio. Since the note holder does not own the properties they do not need to worry about maintenance and disposition issues across many cities -- issues that are often a problem with nationwide REO portfolios.

3. Approximately 80% of notes are performing notes so that there are about 80 million performing residential notes, as well as trillions of dollars worth of performing commercial notes. Hence there are just about 16 times more performing notes as there are REOs, even if the commercial inventory of performing notes is not included. This makes it much easier to get direct to real sources and to real buyers.

4 More patient exit strategy: since the note holder is making their yield every month then they can more patient with their exit strategy Indeed, one very popular exit strategy is to hold all of the notes completely to full term if the cash flow is sufficiently attractiv.e When an investor has the luxury of patience with their exit strategy the options are always better. Time is on the note holder's side, not working against him.

5. Performing notes are easier to flip since a prospective investor will see a monthly return immediately on their new investment.

6. This investment is truly headache free -- like a triple net lease without any liability issues. The mortgage checks arrive every month without having to worry about landlord issues or home ownership issues, since only the notes are owned by the note holder, not the properties If the note ever becomes non-performing it is still secured by the underlying property, and in some states, by other assets of the note payor.

7. The properties are usually well maintained. When the notes are performing you tend to have more home owners. Good note payors make good home caregivers.