Buy Notes – Know Your Borrower

A friend of mine who is a note broker, set up a call for me with the Senior Vice President of a CA bank. He was in charge of the banks note sales.

The SVP has 3 non-performing loans, commerical loans in the LA area. Ignore the fact that they’re commercial right now.

Communication with Your Borrower, a Lesson on Buying Notes

Keep listening…

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

And that she hasn’t spoken to the borrower (a builder/developer) in several months.

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 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.

Let me explain…

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.

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.

Buying Notes – My Advice

Make fantastic returns when buying notes without having to foreclose or to sell the note on 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 any professional golf player get only a course with 5 out of their 12 clubs?

Would that be somewhat limiting to 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.

That was the advice I gave to the SVP at the LA bank today.

Will they take my advice? I am going to be tracking her discounted notes to see if any of them end up in bankruptcy court.

If those notes do end up in bankruptcy, it’s for certain that she will be wishing that she kept communication with her borrowers.