Market and Investment

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.

How to Buy Notes…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.

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 told me she wasnt concerned because the property values would allow them to pay off their loan.

Buy Notes - My Concerns

The main thing that I’ve learned while I’ve been in the note buying business is that your relationship with your borrower is key and you need to manage it properly.

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:

refinance, short sales or deed-in-lieu, reperformance, note sale, and foreclosure.

Out of these options, the only 2 that will succeed with no borrower contact are foreclosure and note sale.

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

When buying notes, you can earn terrific returns without having the either sell the note or foreclose on the property.

So if you lose contact with your borrower, you are essentially killing about 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?

I’m pretty sure of it.

It sure would be entertaining watching him hit a putt with a 9-iron.

I know it can be painful, but working with your borrower is essential in the note buying business.

This is the same advice that I shared with 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.

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.