Buy Notes – Know Who Your Borrower Is
Buy Notes – Do You Know Your Borrower?
I recently was on a call with a Sr Vice President of a California bank, they were in charge of the banks note sales. I was introduced by a broker friend of mine.
The bank had 3 defaulted mortgages which were commercial loans based in the Los Angeles area.
A Buy Notes Lesson about Golf Clubs and why to Communicate with Your Borrower
Hear me out…
As we continued our conversation…the SVP at the bank notified me that one of the loans had a scheduled foreclosure sale in 2 weeks.
And that she hasn’t spoken to the borrower (a builder/developer) in several months.
I asked her if she was concerned about the loans or not, and if she was worried about whether she would have any problems taking over the properties through the foreclosure.
She let me know that the bank didn’t have too many concerns because the property values were enough to pay off their debt.
My Concerns With Buy Notes Situation
The most important thing that I have learned is that building the relationship with your borrower is key. This is probably one of the most important concepts in the note buying business. Manage your relationships.
By not working with your borrower, you can really mess up your chances of getting out of your note deals.
This is why…
For all loans, there are 5 Note Buying Exit Strategies:
foreclosure, refinance, short sale or deed-in-lieu, note sale, and reperformance.
Only 2 of those plays, foreclosure and note sale, can succeed without any communication at all with the borrower.
The bank has chosen foreclosure as their exit in this example. But there are risks with foreclosures, the main one being the high possibility that the borrower will file for bankruptcy. If this occurs, you will not be able to recover the property.
Tip on Buying Notes
Make fantastic returns when buying notes without having to foreclose or to sell the note on to someone else.
And if this is true, then not maintaining contact with your borrower will jeopordize 60% of your note buying exits. (3 of the 5)
Would a seasoned golfer get onto a golf course with only 5 out of their 12 clubs?
That would limit their game right?
I’m pretty sure of it.
But boy would it look funny hitting a putt with a 9-iron.
Much as it can be painful or unappealing to some of you – working WITH your borrower is essential when you buy notes.
That was the advice I gave to the SVP at the LA bank today.
We’ll see if she takes my advice – we’ll be tracking her nonperforming notes to see if any of them end up in bankruptcy.
If those notes do end up in bankruptcy, it’s for certain that she will be wishing that she kept communication with her borrowers.