About Short Sales

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

Hear me out…

So the SVP told me that one of the loans has a foreclosure sale scheduled 2 weeks from now.

The bank had not been in contact with the builder/developer (borrower).

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

Buy Notes - My Concerns

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.

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

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.

My Advice on Buying Notes

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 professional golfer get onto a course with only 5 of 12 clubs?

Wouldn’t that limit their game?

Probably.

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.

I will be tracking her non performing notes so see if any of them end up in bankruptcy. Then we will know if she took my advice.

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.