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Why Buying Loan Notes Isn’t the Same As Buying Real Estate

In response to the depressed state of the real estate and capital markets, large amounts of capital are now chasing opportunities to purchase defaulted commercial real estate loans at a discount. Not since the savings and loan crisis in the late 1980s has the market expected a comparable volume of loans to be sold.

For savvy buyers, this is a chance to earn enviable returns. However, it also is an opportunity for those who do not fully understand the nature of what they are buying to lose money — lots of money.

Depending on the quality of the loan documents and the history of the loan, the borrower may have defenses and claims that can seriously delay a foreclosure on the collateral and reduce the ultimate return to the loan buyer.

Discussions at industry trade shows and seminars that focus on buying distressed mortgage debt often only address the need to price and evaluate the underlying real estate. While the real estate asset securing the loan ultimately is the source of repayment, a buyer of these loans must realize that he is not buying the real estate collateral.

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