Buy Notes – Hitting a Put Shot With a 9-Iron
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 SVP has 3 non-performing loans, commerical loans in the LA area. Ignore the fact that they’re commercial right now.
A Buy Notes Lesson about Golf Clubs and why to Communicate with Your Borrower
Keep listening…
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 This Buying 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.
And if you don’t work with your borrower, then you’re really hurting your chances of getting out of a note deal.
Let me explain…
There are basically 5 Exit Strategies in Note Buying:
foreclosure, refinance, short sale or deed-in-lieu, note sale, and reperformance.
Only 2 of those plays, foreclosure and note sale, can succeed without any communication at all with the borrower.
But the risk that the foreclosure runs – and foreclosure is the path that the banker is taking in this example – is that the borrower may file for bankruptcy and postpone the time when you recover the property.
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 any professional golf player get only a course with 5 out of their 12 clubs?
Would that be somewhat limiting to their game?
Most likely.
But boy would it look funny hitting 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.
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.
And if those notes do – there’s a good chance that she’ll regret not having kept in touch with her borrower.
