Buy Notes – Who is Your Borrower?
A friend of mine who is a note broker, set up a call for me with the Senior Vice President of a CA bank. He was in charge of the banks note sales.
The bank had 3 defaulted mortgages which were commercial loans based in the Los Angeles area.
Communication with Your Borrower, a Lesson on Buying Notes
Hear me out…
The bank told me that one of the loans was in foreclosure and had a sale scheduled in a couple of 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 answered: “No, because we feel the value of the properties is sufficient to pay off our loan.”
My Concerns With Buy Notes Situation
If there’s one thing I’ve learned in this note buying business, managing the relationship with your borrower is key in 60% of all cases.
By not working with your borrower, you can really mess up your chances of getting out of your note deals.
Let me explain…
There are essentially 5 Buying Notes Exit Strategies for all Loans:
foreclosure, refinance, short sale or deed-in-lieu, note sale, and reperformance.
Foreclosure and note sale are the only 2 exits that you can do with no communciation to your borrower.
But the risk that the foreclosure runs – and foreclosure is the path that the banker is taking in this example – is that the borrower may file for bankruptcy and postpone the time when you recover the property.
Buying Notes – My Advice
Buying notes can bring you high returns without have to foreclose or to sell the note to someone else.
So if you lose contact with your borrower, you are essentially killing about 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?
Would that be somewhat limiting to their game?
I’m pretty sure of it.
It would be a funny sight watching him hit 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.
This is the advice that I gave to the SVP at 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.
If those notes do end up in bankruptcy, it’s for certain that she will be wishing that she kept communication with her borrowers.
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