The 2008 real estate crisis popularized NPL, an acronym for non-performing loans or, in Spanish, non-performing loans. These are mortgage loans or credits that the debtor cannot pay and that generally have a home as collateral, meaning that if they are not paid, the creditor keeps the house backing them. Bank balance sheets then filled up with this type of product and when the bubble burst, they were left with the debt and a huge amount of properties, colloquially and graphically called toxic brick. They are still digesting it today. NPLs deteriorate the entities’ balance sheets, which is why it is very common for the banks themselves to sell these loans in packages to specialized investors, who manage them or recover the value of the linked asset. It is a risky product, very risky if you do not understand what it consists of, and it is now starting to reach the individual market with the same ease as daily housing sale and purchase ads arrive.
“Buy asset below market price. Read special conditions that we describe. Purchase of NPL mortgage debt: possibly occupied, cannot be visited and no financing available, cash purchase,” reads one of the ads that in recent weeks may have reached individuals looking to buy a home in different parts of Madrid. The price, well below market level, is its main attraction and main hook, but it is advisable to read the fine print, which in this case is extensive, because the buyer does not acquire the home directly, but the unpaid mortgage debt that the current owner has with the financial institution.
“By acquiring that debt, the investor takes the position of the creditor bank, with three usual recovery routes: negotiate a write-down or reach an agreement with the debtor, initiate a foreclosure process to take possession of the property, or resell the debt to another investor,” explains Francisco Iñareta, spokesperson for the real estate portal Idealista.
This is how professional profiles work with this type of product. Investment funds, family offices, and professional investors are used to dealing with them and acquire them in large volumes; the novelty now is that those same investors are trying to get rid of them by resorting to individualized sales and are starting to reach the usual real estate agencies. “Lately they are seen more frequently,” admits José María Alfaro, president of FAI, the National Federation of Real Estate Associations. “Investors want to get rid of them just like rented or occupied homes. They are aware that the market is near exhaustion and prefer to unwind positions and monetize assets at the peak. They apply that saying that ‘the last dollar is earned by someone else’,” he adds.
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However, Alfaro explains that it is not common to find NPLs for individuals in real estate agencies because often the agencies themselves do not understand what it is about. He also warns that it is a risky product, with uncertain profitability and a long judicial future that can extend for four to six years.
The legal complexity of the asset makes access to conventional bank financing difficult and requires a profile capable of assuming legal processes. “The loan accumulates unpaid amounts, interest, and possible legal costs that the new holder must assume. Precisely that risk justifies that these assets are offered with significant discounts compared to market value,” adds Francisco Iñareta.
For Ricardo Gulias, CEO of the broker RN Tu solución Hipotecaria, the increase in cases of occupation has been another factor that has spurred large investors to get rid of NPLs. “There are so many unpaid loans with occupied houses that they are not interested in managing them and it has become fashionable to contact real estate agencies in certain areas to try to channel their sale,” he explains. According to his experience, the purchase price can be up to 50% below the value of the property. “It is important to distinguish that in the NPL you do not have ownership as when you buy an occupied home, where the buyer only lacks possession. In the NPL you have the credit, that is, you act as the bank and are responsible for managing the collection of the debt or negotiating the exit of the occupant, but you do not have ownership.” He wishes luck to anyone who dares to take this option.
