Insurance and Credit

Buy Notes – Do You 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 Sr Vice President advised me that they had 3 non performing notes that were commercial loans in the LA area.

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.

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

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 let me know that the bank didn’t have too many concerns because the property values were enough to pay off their debt.

My Concerns With Buy Notes Situation

If there’s one thing I’ve learned in this note buying business, managing the relationship with your borrower is key in 60% of all cases.

And if you don’t work with your borrower, then you’re really hurting your chances of getting out of a note deal.

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.

Tip on Buying Notes

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

Would that be somewhat limiting to their game?

I’m pretty sure of it.

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.

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