Buy Notes - Hitting a Put Shot With a 9-Iron
May 28, 2009 Real Estate Properties
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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 Sr Vice President advised me that they had 3 non performing notes that were commercial loans in the LA area.
A Buy Notes Lesson about Golf Clubs and why to Communicate with Your Borrower
Stay with me here…
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.
The bank had not been in contact with the builder/developer (borrower).
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.
And here is the reason…
There are basically 5 Exit Strategies in Note Buying:
reperformance, refinance, short sale or deed-in-lieu, refinance, note sale, foreclosure.
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.
My Advice on Buying Notes
Buying notes can bring you high returns without have to foreclose or to sell the note to someone else.
If that’s true, then losing contact with your borrower essentially kills 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?
Would that be somewhat limiting to their game?
Probably.
But boy would it look funny hitting 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 advice that 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.
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Tags: buy notes, Foreclosure, home loans, how to buy notes, Mortgages, note buying, Real Estate, Real Estate Properties, residential housing, sell notes, selling notes, Short Sales
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