Buy Notes – Hitting a Put Shot With a 9-Iron

Buy Notes – Know 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.

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.

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

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.

This is why…

There are essentially 5 Buying Notes Exit Strategies for all Loans:

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

Buying Notes – My Advice

Buying notes can bring you high returns without have to foreclose or to sell the note to someone else.

And if this is true, then not maintaining contact with your borrower will jeopordize 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?

Most likely.

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.

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.