Collecting Arrears: Tips for Collecting the Most From Your Delinquent Notes

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A week or so ago, a colleague of mine from BiggerPockets reached out and made the valuable suggestion that I write an article, specifically, on arrears. When note investing, especially with delinquent assets, you will run into the question of how to collect arrears.

Notice I said collect. When investing in performing notes and mortgages, we think more of passive investing where there’s usually little interaction, if any, with the borrower. But with nonperforming notes, collections are a more prominent factor. Your ability to contact and negotiate with the borrower really determines how successful and profitable you’ll be in the business.

So What Exactly Are Arrears, and What Do They Consist Of?

Arrears are the overdue debt not including UPB (Unpaid Principal Balance), such as any missed payments, late fees, or corporate advances. Corporate advances can consist of any money spent towards legal, any other costs that are spent in order to collect, or any money spent in order to protect one’s interest as a lien holder. A few good examples of are tax payments, homeowners insurance, condominium or homeowner association fees, or any other reinstatement fees paid to a more senior lien, etc.

But, How Do You Approach Arrears When Dealing With a Homeowner?

Once you do make contact with the homeowner(s) and they let you know their intention (and it is to stay in the home), now the focus becomes affordability.  We use our Homeowner Financial form to go over their income and expenses, as well as their assets and liabilities, to determine how much money they have available and how much they can put towards a monthly payment.  At this time, we try to determine what disposable income, or capital, if any, is left to be put towards their arrears.

Oftentimes, a homeowner will say, “I can afford to make $___towards payments,” but they don’t include their overdue balance (or arrears) in this statement. The asset manager may respond, “That’s great that you want to address the debt by making payments, but that’s only half of the solution. Management will want to see something paid towards missed payments.”

It is very important to try to collect as much towards arrears as possible because this will allow the delinquent note owner to take as much of the risk as possible off the table. One way to potentially increase the amount of arrears that’s collected, or increase the odds of receiving a discounted payoff, is to give the homeowner incentive by making it worth it for them to do so. This could include offering more favorable terms like a lower interest rate, a lower pay off, or different term lengths.

The focus should be—what’s the most important to the homeowner- and, all of these would be based on the premise that the more money that’s put towards arrears, the more we can do for the homeowner.  Asset managers may mention how other borrowers were able to access funds to put towards their arrears—everything from borrowing from a 401(k), borrowing from family and friends, borrowing from a life insurance policy, or even utilizing an income tax check.  Only in an extremely rare case are we not able to collect anything at all towards arrears. It’s very unusual that someone can’t come up with at least $500-$1000 when they haven’t made a payment on their home’s mortgage in years.

It Really Comes Down to Three Things:

What can they afford? How hard are they trying? And, can they prove it?

If the homeowner makes a solid effort in each of these categories, we will bend over backwards to help them, even if it means not collecting any arrears at all.  If this is the case, we may revisit their situation in six or 12 months to see if anything else has changed, where they may now be able to afford something towards arrears (February, March, and April are the best months to collect arrears due to tax returns).

This is a Trust and Verify type of situation, and we will often require documentation (tax returns, pay stubs, checking account statements, etc.) to back up all of the financial information they’ve provided.  After all, a bank would request similar information if they were doing a loan modification as well.

So, the level of arrears that you collect will really depend on how persistent, creative, and skilled you are when dealing with the homeowner.  Arrears have been a very profitable and consistent source of revenue for my organization. And, they can be for yours as well.

Photo Credit: JD Hancock

About Author

Dave Van Horn

Since 2007, Dave Van Horn has served as president and CEO of PPR The Note Co., a holding company that manages several funds that buy, sell, and hold residential mortgages nationwide. Dave’s expertise is derived from over 30 years of residential and commercial real estate experience as a licensed Realtor, a real estate investor, and a fundraiser. As the latter, Dave has raised over $100 million in both notes and commercial real estate. In addition to his investments and role as CEO, Dave’s biggest passion is to teach others how to share, build, and preserve wealth. He authored Real Estate Note Investing, an introduction to the note investing business, helping investors enter the “other side” of the real estate business.


    • Dave Van Horn


      I saw both the Washington Post article(s) and the forum. Although timely, I feel the need to stress tax liens are very different from mortgages in what can be done to collect the debt, how it’s purchased, the monitoring of collections, and the knowledge of the debt to the borrower (one thing that struck me was how little notice was given and for such small amounts owed).

      Either way, nothing pains me more than to see a homeowner unwillingly or unknowingly lose their home. One of the main points of my article is that collections should be based on affordability. Unfortunately D.C.’s system seems broken in many ways and no matter how a system is designed, companies should operate ethically. What I hoped to get across in the article is that in doing so (like by learning the homeowner’s priorities and working alongside them on a payment plan or arrears) both parties involved could have a mutually beneficial outcome.

      Thanks for commenting,

  1. From the other side of the transaction, what should one do when the note holder has seeming dropped off the planet?

    I have two mortgages that I have not been able to get a payoff letter.

    I am contemplating starting litigation to get their attention.

  2. Great article as always. Arrears are interesting to me because one, they aren’t listed in the UPB and two, they can significantly magnify the returns. Most of the people haven’t been paying for years so if I understand correctly, they sometimes owe more in arrears than their balance…

    I didn’t know this.. you can recuperate your legal fees by tacking them onto the arrears? That seems so logical since it’s the borrower’s fault, but I wrongly believed this was considered cost of doing business.


    • Dave Van Horn

      Thanks Patrick!

      Arrears can be a great way to recapitalize or partially recapitalize on your note. As far as owing more in arrears than the original UPB, that certainly can happen, especially when you’re buying loans that are multiple years past due and/or high interest rates. Our record was 10 years past due. But we still always split the discount with the borrower to try to make their workout/arrears as beneficial as possible for both parties.

      And legal fees can definitely be recuperated, but you’re odds are better when there’s equity in the deal. The same goes for arrears.


  3. How does the amount you usually collect initially towards the arrears compare to your total investment?
    I was talking with some local heavy note investors and they say that they often recover much more than they paid for the note.

    • Hi Shaun,

      This is something we track on a monthly basis and we’ll typically average close to 25% of note cost in arrears. The largest I remember us collecting on a 2nd mortgage was around $50K in arrears, so you can see that this can be pretty significant especially over time.


      • That is pretty interesting Dave.

        However my question was how the amount you INITIALLY collect might compare to your investment.

        For example the local group I was talking with might have a situation like this.
        Purchase a note with a $20K balance with another $5K in arrears for $2,000.
        After making contact with the borrower and discussing options to avoid foreclosure they agree to a “Good Faith Payment” of $2,500 towards the arrears.

        So now the investors have recovered all of their investment and a decent little profit up front and any payments or value on resale goes right to the bottom line.

        They made it sound like this is pretty common. Do you see this type of situation often?

        (Not sure how much the details matter but they are mostly buying non-performing 2nds where the 1st is current and usually there would be enough equity that the 1st at least is not underwater)

  4. Hi Shawn,

    It’s difficult to give a specific example because we deal with many asset classes with different prices and there’s multiple pools. But, generally speaking, the 25% of the note cost is the percentage of our investment that we initially collect in arrears. There’s also the factor of time–depending on if we collected arrears 3 months into the deal or 3 years into the deal. The other biggest factor is our negotiation skills, depending on the experience level of the asset manager. We also collect arrears on upside down assets.

    Yes, we do see that type of situation often. There’s a very small percentage of notes that we do not collect arrears on.

    I hope this helps!


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