Buy Notes - Knowing Your Borrower
Buy Notes - Who is Your Borrower?
I just got off the phone with the Sr. Vice President of a California bank in charge of note sales, and a note broker friend of mine who set up the call.
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
Keep listening…
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 worried about possible problems when taking over the properties through foreclosure. And if she had any other concerns regarding the loans.
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 This Buying 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…
There are essentially 5 Buying Notes Exit Strategies for all Loans:
reperformance, refinance, short sale or deed-in-lieu, refinance, note sale, foreclosure.
Only 2 of those plays, foreclosure and note sale, can succeed without any communication at all with the borrower.
In this example, the bank has chosen foreclosure as the exit. But the time it could take to recover the property can easily be postponed, if the borrowers file for bankruptcy. This is one of the risks associatied with foreclosures.
Tip on Buying Notes
When buying notes, you can earn terrific returns without having the either sell the note or foreclose on the property.
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 any professional golf player get only a course with 5 out of their 12 clubs?
Wouldn’t that limit their game?
Probably.
It sure would be entertaining watching him hit a putt with a 9-iron.
Working with your borrower is essential when you are buying notes. It can be painful, but it is what has to be done.
This is the same advice that I shared with the LA bank today.
Will they take my advice? I am going to be tracking her discounted notes to see if any of them end up in bankruptcy court.
And if the notes do end up in BK, I am pretty sure that she will be regretting the fact that she lost communication with her borrowers.
Leave a Reply
You must be logged in to post a comment.