Buying Non-Performing Notes From Banks: A Working Playbook

Buying non-performing notes from banks works like this: you acquire a defaulted mortgage at a discount steep enough that you can wipe out the arrears, restructure the borrower’s payment down to something they can actually pay, and still earn a strong cash-on-cash return on what you paid. If the borrower won’t re-perform, you foreclose and end up owning the hard asset for a fraction of its value. The discount is where the return lives — not the payment.

Kevin Pritchett, a Chicago attorney who has invested in real estate for roughly 35 years, once owned about 60 buildings and 200 units. He sold the hard assets and now holds around 100 notes representing roughly 132 doors, with about 85% of his business coming from buying real estate through notes and mortgages.

Below: how he sources paper from banks, the re-performing math he uses, what he does when a note won’t re-perform, how he underwrites a tape and decides to walk, and the legal housekeeping most note buyers skip until it costs them.

From the Real Estate Pros Show

This article draws on an interview with Kevin Pritchett of Thor Capital Holdings, LLC on the Real Estate Pros Show, hosted by Scott Bursey.

Why a 200-Unit Landlord Switched to Buying Notes

Pritchett built to roughly 60 buildings and 200 units and hit a net worth right around a million dollars — against about a million dollars of debt. He describes waking up in a cold sweat, doing the arithmetic on what happens if anything goes wrong, and realizing he was successful on paper and miserable in practice.

The root cause was specific. He is a strong deal analyst and not a handyman, and he undervalued property management. He calls that the most expensive lesson of his 35 years: he had to liquidate buildings fast when things started going south, and the forced sales cost him an amount of equity he can only guess at.

Notes solved the part of the problem he actually hated. He is not a landlord on any of them. He makes sure taxes are paid and he collects the cash flow.

Roughly five or six years ago he switched from buying hard assets to buying paper from banks, and about 85% of his business now comes from buying real estate through notes and mortgages. His current book is around 100 notes representing about 132 doors, all in the Chicagoland area so he can keep an eye on them — mostly single-family homes, two-flats, and three-flats.

The question that drove the shift is worth borrowing regardless of what you hold: would you buy your own rentals again today? Pritchett asks long-time owners that for a reason. Cash flow and net worth are only half the ledger. The other half is whether you like the life the portfolio requires you to live.

Where the Notes Come From: Building Bank Relationships

Pritchett’s deal flow is almost entirely relationship-driven, and it took two to three years to build. He cold called banks and told them one thing: he buys cash flows. Nothing fancy, no funnel. Just repeated contact until the banks knew who he was.

Now the direction has reversed. Banks reach out to him when they have paper, because they know he will close and that he has the resources to close. That is the whole currency of this business. A bank sending out a tape does not care about your website. It cares that the last three deals you were given actually funded.

Timing matters. Quarter-end is a strong window, because banks want loans off their books before the books are reported. Pritchett also expects a sharp increase — his word is “tsunami” — in notes, mortgages, and REO that banks take back over the next 12 to 18 months. His stated concern is not finding the opportunities. It is having enough cash to take advantage of them.

The contrast with his seller-direct marketing is instructive. He spends roughly $5,000 to $6,000 a month on Facebook and Meta to generate seller leads, and he says the cost has exploded while the gap between seller expectations and real value has widened. The bank channel costs him nothing but time and reliability.

If you have no bank relationships yet, assume a multi-year build. Call, state plainly what you buy, follow up, and be prepared to close small and fast the first time someone tests you.

I buy non-performing notes at a steep discount and turn them into performing notes. Let’s say they were paying $1,700 before and they couldn’t. I can take them down to $1,200, even $1,000, do very well cash-on-cash, and they keep the home.

— Kevin Pritchett, Thor Capital Holdings

The Re-Performing Math: Cutting the Payment Without Cutting Returns

Here is the core workflow. Pritchett buys non-performing notes at a steep discount. He then goes to the borrower and offers to erase the past-due balance entirely and start fresh. The conversation is simple: forget everything behind us, what can you actually pay?

His own example: a borrower who was on the hook for $1,700 a month and could not make it. Because he bought the note at a deep enough discount, he can restructure that payment down to $1,200 — even $1,000 — and still do very well on a cash-on-cash basis. The borrower keeps the home. He keeps a $1,000-a-month cash flow.

The thing to understand is that nothing about that transaction is charity, and nothing about it depends on the borrower paying the original terms. The yield was fixed the moment he agreed on a purchase price with the bank. The payment reduction is simply what makes the loan collectible again.

That is the mental shift from landlording. On a rental, your return comes from operating performance — rents collected, expenses controlled, units turned. On a non-performing note bought right, your return comes from the basis. Everything after that is servicing and making sure the taxes are current.

Which means your underwriting discipline has to be at the bid, not after. If you pay a price that only works if the borrower resumes the original payment, you have bought a rental with extra steps and none of the control.

When It Doesn’t Re-Perform: Foreclosure as the Backstop Exit

Not every borrower re-performs, and Pritchett’s plan for that is straightforward: take it to foreclosure and end up owning the hard asset for, in his words, literally pennies on the dollar.

At that point he has a choice — rent it or sell it. He typically sells and redeploys the cash into more notes, because that gives him more leverage than holding one house. It also keeps him out of landlording, which is the whole reason he moved to paper in the first place.

The reason this works as a backstop is the same reason the re-performing math works: the basis. If you bought the note at a steep discount to the value of the collateral, foreclosure is not a loss event. It is a slower, less convenient exit with a different asset at the end. The deal is still in the money.

Two caveats worth stating plainly. First, this is Pritchett’s described process from his own portfolio, not legal advice. Second, foreclosure timelines, procedures, borrower protections, and costs vary substantially by state — a judicial foreclosure state and a non-judicial state produce very different carrying costs and very different holding periods on the same note.

Underwrite the foreclosure path before you buy, not after the borrower stops answering. Know the state, know the approximate timeline, know what the property is worth as-is, and know whether your capital can sit that long.

Underwriting the Tape and Knowing When to Walk

Pritchett receives note packages as spreadsheets and analyzes them deal by deal. He only pursues the notes that work for his parameters, and critically, he knows the bank’s number before he makes an offer. By the time he submits a price, he already knows it sits inside what the bank will take.

The result is a conversion rate that looks nothing like seller-direct acquisition. On the seller side, he closes roughly two to three out of every ten appointments. On note offers, acceptance is near universal — because he is not bidding to find out the answer, he is bidding on deals he has already confirmed will clear.

When note deals do stall, there is one cause. The bank needs a specific number it cannot go below, frequently because its own investors have a certain amount in that loan and the bank has to recover it. Pritchett’s response is to decline and move on: I can’t give you X. I just can’t. He is not in a position where he has to do any deal.

He frames the underlying skill as being a “deal engineer” — a term he picked up from an early mentor. It means being able to look at any situation and identify the exit strategy, and just as importantly, recognizing when there is no meeting of the minds and nothing you can construct will bridge it.

For note buyers that translates into a short discipline:

• Know your required yield before you open the spreadsheet.
• Know the bank’s floor before you name a price.
• Price the foreclosure exit as well as the re-performing exit.
• When the floor is above your number, say so and ask for the next tape.

The Legal Housekeeping Note Buyers Skip

Pritchett practices law as well as invests, and he says the legal side is where good operators get hurt. Three items come up repeatedly in his practice. None of what follows is legal advice — get your own counsel.

Succession language in the entity holding your assets. Say your notes and properties sit in one LLC and you are the manager. You die, and the operating agreement says nothing about who receives your interest. Your spouse or heirs are now in probate court. Probate requires public notice, which means anyone who believes they are owed money can file a petition against the estate — and that turns into a lawsuit with motions and discovery. Pritchett has seen this three times in 30 years, and in those cases the heirs ended up selling. Portfolios were broken apart. The fix is a single sentence directing your interest to a named person or a living trust. He calls it a potential $20,000-plus mistake that costs nothing to prevent.

Taking investor money is a securities transaction. Whether or not you think of it that way, it is. Beyond filing correctly, the piece most people omit is written disclosure of reasonably foreseeable risks, with signed acknowledgments kept in the file, including a recommendation that the investor consult their own financial and legal advisors. Pritchett’s point is blunt: a deal going bad is not what gets you in trouble. Failing to disclose the risk is.

If you are the one writing the check, demand a personal guarantee and run real due diligence. Ask for a track record. Search for lawsuits, judgments, and bankruptcies.

Frequently asked questions

How much of a discount do you need on a non-performing note to make re-performing it work?

Deep enough that you can forgive the entire arrearage, cut the borrower’s payment materially, and still hit your required cash-on-cash return on what you paid. Pritchett’s working example is a borrower who could not make a $1,700 payment being restructured to $1,200 or $1,000 — and that restructured payment still producing a strong return against his basis.

The test is not a fixed percentage. Price backward from the payment you believe the borrower can actually sustain and the yield you require, then check that number against the as-is value of the collateral so foreclosure remains profitable.

How do you get banks to send you note tapes if you have no track record?

You call them and keep calling. Pritchett built his bank network by cold calling and telling them plainly that he buys cash flows. He describes it as a two-to-three-year process before the relationships matured to the point where banks started reaching out to him.

What converts a relationship into recurring tapes is closing. Banks route paper to buyers who perform and who have the resources to fund. Close small and clean early, and ask again at quarter-end, when banks are most motivated to clear loans off their books.

Is note investing really passive compared to owning rentals?

Closer to passive, but not passive. Pritchett is explicit that real estate is not a passive investment — that realization is what pushed him out of owning 200 units. What notes removed was the landlording: no tenants, no repairs, no property management.

His description of holding notes is making sure the taxes are paid and collecting the cash flow. The active work shifted to the front end — sourcing tapes, underwriting, and negotiating with banks and borrowers.

What happens if the borrower won’t re-perform after you buy the note?

You foreclose and take title to the property. Pritchett’s stated fallback is that foreclosure leaves him owning a hard asset for pennies on the dollar, at which point he can rent it or sell it. He typically sells and redeploys the proceeds into more notes.

Foreclosure procedure, timelines, and costs vary significantly by state, and this is a description of one investor’s process rather than legal advice. Price that exit before you bid, and confirm your capital can sit through your state’s timeline.

What legal documents should be in place before you take investor money for a note fund?

At minimum, written risk disclosures covering the reasonably foreseeable ways the deal can fail, signed and acknowledged by the investor, with language recommending they review it with their own financial and legal advisors — and those signed documents kept in your file. Pritchett’s position is that investors losing money is not what triggers liability; failing to disclose the risk is.

You also need to treat the raise as the securities transaction it is and file correctly for whatever exemption applies. That is a conversation with a securities attorney in your state, not something to copy from a template.

The bottom line

Start the bank calls now, before the paper shows up. Pritchett’s pipeline exists because he spent two to three years telling banks what he buys and then closing when they tested him — and if the volume of defaulted loans he expects over the next 12 to 18 months materializes, the buyers who get the first call will be the ones who made the introduction a year earlier.