What discount should I expect when buying a non-performing commercial mortgage note?

For a non-performing note on a property worth less than the outstanding debt, expect to pay 55-75 cents on the dollar to the outstanding balance, depending on collateral quality, state foreclosure timeline, borrower financial capacity, and competitive interest in the note. For notes on properties worth more than the debt (borrower is just unable to service), the note may trade at 85-95 cents on the dollar as the lender receives near-full recovery.

How long does the full process take from buying a note to owning the property?

In non-judicial foreclosure states with a cooperative borrower: 90-120 days via deed-in-lieu. With an uncooperative borrower pursuing all defenses: 6-12 months. In judicial foreclosure states: 12-24 months, potentially longer with a contested foreclosure and post-foreclosure redemption periods.

Can I get title insurance on a property acquired through foreclosure?

Yes, but requirements vary. A properly conducted non-judicial trustee's sale in most states supports a title insurance policy with limited exceptions. A judicial foreclosure with court confirmation generally supports a clean title policy. Note: foreclosure does not automatically extinguish all junior liens, your title insurance will except any liens that survived. Work with an experienced commercial title underwriter, not a general residential agency.

What are the tax implications of buying a discounted commercial mortgage note?

The discount on a non-performing note purchase is generally treated as capital gain (short-term or long-term depending on hold period) when the note is ultimately resolved or sold. If you end up owning the real estate through foreclosure, your basis in the property is the acquisition cost of the note plus foreclosure costs, not the original loan balance. Consult with a tax advisor experienced in distressed debt and commercial real estate before any note purchase.

What happens to a mezzanine loan when I buy the senior mortgage note?

The mezzanine loan is a separate piece of debt secured by a pledge of the equity in the property-owning LLC, not by a mortgage on the real estate. As senior mortgage note holder, your foreclosure extinguishes the mezzanine loan's security interest in the real estate but the mezzanine lender retains its UCC rights against the equity. Review the intercreditor agreement between the senior mortgage and mezzanine loan, it governs the relative rights and notification requirements between the two positions.

How to Buy a Commercial Real Estate Note