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.
How to Buy Notes…communicate with your borrower
Keep listening…
The bank told me that one of the loans was in foreclosure and had a sale scheduled in a couple of weeks.
And also mentioned that the bank had had no contact with the borrower, or builder/developer in this case.
So I questioned her if she had any concerns about the loans and also questioned if she thought the bank would run into any problems foreclosing on the properties.
She told me she wasnt concerned because the property values would allow them to pay off their loan.
My Concerns With Buy Notes Situation
The most vital thing that I have learned is that building the relationship with your borrower is key. This is probably one of the most vital 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:
foreclosure, refinance, small 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.
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.
Tip 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 right, then losing contact with your borrower essentially kills 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?
Wouldn’t that limit their game?
Probably.
But boy would it look amusing hitting 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.
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.
If those notes do end up in bankruptcy, it’s for certain that she will be wishing that she kept communication with her borrowers.