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Buy Notes - Who is Your Borrower?

I recently was on a call with a Sr Vice President of a California bank, they were in charge of the banks note sales. I was introduced by a broker friend of mine.

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

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

And also mentioned that the bank had had no contact with the borrower, or builder/developer in this case.

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 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…

There are basically 5 Exit Strategies in Note Buying:

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

Foreclosure and note sale are the only 2 exits that you can do with no communciation to your borrower.

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 seasoned golfer get onto a golf course with only 5 out of their 12 clubs?

Wouldn’t that limit their game?

Probably.

It sure would be entertaining 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 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.