The Dirty Little Secret Of Non-Performing Notes

by Don Konipol, MBA

For investors considering investing in non-performing notes (NPNs), a.k.a. non-performing loans (NPLs), that are residential and owner-occupied, here is how a typical situation plays out.

A bank, bank holding company or asset management and disposition company puts together a package of, say, 1,000 NPNs and asks for bids. The qualified bidders are the major hedge funds, private investment partnerships and private equity funds able to pay $25M cash and more. Their analysts are usually MBAs in finance who graduated at top of their class and have been trained to use and understand the most sophisticated financial modeling theories and techniques.

The winning bidder pays for and gets ownership of these 1,000 NPNs. Their analysts then drill down and do a deeper and more thorough analysis of each note to determine which ones will yield a risk-adjusted profit above their particular profit threshold.

Say they determine that they will keep 800 notes. The next step is to offer the 200 notes they do not want to another hedge fund or private equity fund with a different risk return profile.

The high bidder in this second round buys the 200 remaining notes. After their expert analysts examine each one, let’s say they determine that 150 notes meet their risk-adjusted return criteria. This fund now asks for bids from retail asset disposers.

The winning bidder purchases the last 50 notes and does their analysis to determine if ANY of those leftover notes are worth holding. Say they find five notes that happened to be overlooked or misanalysed by the previous two funds. They then take those notes and package them with others from similar purchases and sell them along with their analysis to private investment funds.

This leaves 45 notes from a package of 1,000 that three professional investment funds, doing intensive analysis by highly trained MBAs, have determined cannot yield even a minimal investment return.

These are then offered to the individual investor, who according to those in the industry “with something to sell” (the leftover NPNs and/or “training”) can profit enormously by (1) making them re-performing notes or (2) foreclosing and selling the property for large profits.

The pitch from those “with something to sell” is twofold: (1) “There is plenty of meat left on the bone” (actual quote), and (2) if you send the borrower a complete package of all docs, weighing, say, five pounds you will “shock and awe” him into paying on the note.

I highly doubt either of these claims have even a micron of validity.

The parties with a financial interest in you buying into this will cite isolated instances of great success, never mentioning the all-more-frequent instances of total failure.

So at the end of the day the training promoters have collected up to $30,000 per person for their NPN “mentoring”/”coaching” program, the retail asset disposer has made 50% to 100% profit on their inventory, private middlemen have turned a $2,500 investment in a note into $16,000, and my sister-in-law who purchased 5 NPNs over three years ago and has spent large amounts on attorneys, taxes, and brokers has yet to see a penny in return.

To paraphrase, if you don’t know who the sucker is in any ultra-high profit promise situation, it’s you.

Non-performing notes buying

Don Konipol holds an MBA in Finance from the University of Michigan and a B.S. in Economics from the City University of New York. Upon receiving his MBA in 1975, Mr. Konipol went to work for Societe General De Survalliance S.A., Geneva, Switzerland in investment banking.

He left in 1978 to come back to the United States and went to work as a commercial Realtor for First Equity Company in Houston, Texas. In 1984 Mr. Konipol formed the Investment Realty Group to purchase distressed real estate at auction.

He has successfully invested in numerous real estate deals, operating businesses, high yield commercial mortgages, and REITs. In 2002 he formed the Managed Mortgage Investment Fund LP as a high yield real estate mortgage fund, and serves in the capacity of General Partner. The fund invests in a diversified portfolio of short term, high interest real estate mortgages secured by investment real estate. He currently invests his capital and client/investors’ capital in real estate, real estate debt and real estate securities.  Email:

This article originally appeared on at

It was reprinted with permission in the May, 2016 issue of THE PAPER SOURCE JOURNAL.  Click here for subscription information.

9 thoughts on “The Dirty Little Secret Of Non-Performing Notes”

  1. Bill,

    Thank you for everything you do to for our industry and to keep people informed. I often get questioned as to why I never paid for the “high level mentoring” and why I don’t buy NPNs. This is the best answer I can provide. I have forwarded to my AZREIA Note Sub Group as well as my list of investors. I always speak highly of you, Alison and PaperSource and am very proud to be associated with you guys.

    Tom Chase
    Pinnacle funding & Investment Group, LLC
    Surprise, Arizona

  2. Mr. Konipol is spot on! By the time the notes get down to individual investors they are “dog do-do” (to use a polite term). Watch out folks. If you’re buying NPNs, keep your hand on your wallet. While you’re being talked up, your pocket is being picked.

    I’ve seen one major retail note seller keep offering a 2nd mortgage note that had been discharged in Chapter 7 (the borrower cannot be sued on the note) and the 1st mortgage lender had foreclosed on the property (there was no collateral left to secure the note so there was nothing to foreclose against).

    What they were selling was worthless paper! The only way you would know this is if you know how to search and ready bankruptcy court records and pull down and read a title search. This is not something most mom and pop investors know how to do, yet it’s sold like an easy DIY project.

    We need more buyers who are informed. In that way the prices should be pennies on the dollar investment and not the “29% of UPB” the hucksters tell you should be paid. (BTW, UPB is a lousy way to price. When the collateral is way “underwater” and borrower’s income is low, any recovery is a crap shoot.)

  3. Thomas Cullen


    If the borrower of the 2nd has emotional equity in the property, and you foreclose (even with an existing 1st leaving nothing to cover the 2nd) they may well accept a modification, rather than lose the property they have lived in for 20 years. Once they know you are serious, and that legally they can be forced to leave.

    Many think bankruptcy takes the 2nd lien off the property, but it doesn’t.

  4. Partly true, but not the rule. I’ve had a different experience. I nearly tripled my money buying a commercial note from a large hedge fund and doubled my money on another. They had neither the desire to work the smaller balance deals, nor the expertise to work certain asset classes. If you’re fishing in the same old over-fished ponds, then yeah, you’re going to get the scraps. Just gotta use a little creativity.

  5. Great article Don, that’s what I have known all along, they are selling us crap and its buyer beware. With the multiple traveling gurus churning out new note investors like sausages, and after spending a couple years in the trenches, we are being careful of 1st liens, buying more seconds, and looking at physical deals here in Dallas/Fort Worth. Now the 2nds are getting frothy. Buying 1sts up to 70% of ARV is a recipe for disaster when you end up foreclosing and all the holding costs.

  6. Charles Castellon

    Makes sense that regular investors could not compete with those finance MBA geniuses. You know, the ones who created and rated the mortgage backed securities that took down the global economy.

  7. Tried to buy a non-performing 2nd listed on a major note buyer’s website and the seller would not answer questions and cancelled the deal. I suspected a scam after doing the due diligence. Also tried to buy a note on another property on a tape they sent me and found out the property had been foreclosed on by the first lien holder. If you don’t do your due diligence you will be burned, burned and burned.

    I am actively looking to buy non-performing 2nds on owner occupied property located in Tennessee. Would appreciate anyone’s consideration as I am a cash buyer.

  8. Edward Gonzalez


    My experience has been that by the time the note gets to a retail investor, the easy cases have been cherry-picked out — the low-effort “emotional equity” cases are gone. You will have to foreclose from 2nd position and work it that way. It can be done, but it’s more expensive and time-consuming.

    I just took over a cash-flowing rental in KC, BUT it was only after the borrower refused to even try a work-out, which I would have preferred.

    I have the same situation on a house in CA. I have spoken to the borrower, but there is ZERO interest in a work out. Again we will to take it from 2nd position and rent after gosh nows how much in legal expenses.

    I wish I had the “emotional equity” cases. I would prefer to accommodate the borrowers and give them a workout that would fit their cash flow, but I’m seeing borrowers who have no interest in working a win-win with an investor who, unlike institutional lenders, has flexibility.

  9. Ken Kurtz when buying from a large hedge fund. Are you asked to only buy large pool of notes ? or can you cherry pick only one note ?
    and How do I contact one of these large Hedge Funds

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