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Buy Notes – Do You Know 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

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.

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

So I asked her if she had any concerns about the loans and also asked 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 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 essentially 5 Buying Notes Exit Strategies for all Loans:

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

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

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.

My Advice on Buying Notes

When buying notes, you can earn terrific returns without having the either sell the note or foreclose on the property.

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?

I’m pretty sure of it.

But boy would it look funny hitting a putt with a 9-iron.

I know it can be painful, but working with your borrower is essential in the note buying business.

This is the advice that 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.