Once you let it get to this point it becomes difficult to "re-train" the borrower. What do your loan docs/ agreement say about late payments, grace periods and penalties? The late payments are one thing but having equity at stake in an uninsured property would scare me.
If she is consistently late but is in fact paying and progress is being made on the project I would enforce the penalties monthly or on the payoff. If it looks like she is heading in the wrong direction altogether and your equity is at risk then I would see about taking the property back.
@Andrew Michael Thank you so much for the response. Loan doc says 15 day grace period and she was late once for more than 15 days and paid the penalty. I have pushed hard to make sure she purchase insurance before the effective date of cancellation each time. Of course I will buy Insurance (and bill her) if she fails to purchase Insurance on time. Is there a saying that you start foreclosure process only after the borrower missed four payment?
I second what @Andrew Michael said, I would only add that you can't buy insurance since you don't have an insurable interest in the property, you're not the owner. What I've done in the past is contact borrowers insurance agent and paid the premium for borrower and added it to the loan. The other alternative is to find an agent that will do lender forced placed insurance. It's easy to let this insurance thing slip away from you, don't let that happen, you may have more to lose that the borrower does.
@Account Closed Hi, David, thank you for your input. Yes, the loan document has the clauses says that if the borrower fails to pay the insurance, I will pay the premium for the borrower and bill the borrower.
I am more familiar with the Hard Money side but a 15 day grace period sounds too long to me. Money should be due on the first and you have a 5 day grace period.
Anytime someone has defaulted on their loan you can begin the foreclosure process. That being said its usually not worth the time and money. If you can work with them and bring the loan to good standing that is almost always the more advantageous route. Again its all about the conditions of the loan you all signed.
Explain to them your position and why its important they follow the loan terms that were agreed upon. They should see you as a partner in this deal and someone that has interest in seeing them succeed, not just a lender trying to make money off them. If you can identify the issues they are having and create solutions then perhaps you can get them back on track.
If they are truly out of money then perhaps you do a loan mod and roll payments into the loan for an additional point on the back end or something of that nature.
If your borrower is undercapitalized or inexperienced, @Frank Y. , then you have a bigger problem with your underwriting. If so, no solution to these late payments will help you long term and this problem is sure to repeat. Rather than trying to "re-train" your borrowers, you might look at your processes if late payments have been a recurring issue. If not, there is another solution.
Late payments are not a problem we worry about anymore since we haven't received one in years.
Even experienced flippers want to hoard cash so why don't you make it easier for them and turn lemons into lemonade by giving them the option to defer all payments until the property sells. You would add any unpaid amount to the principal balance each month and, if legal in your state, charge interest on that total.
This, in effect, compounds your interest and enables you to automatically reinvest the small amounts of cash that would not be enough to fund another loan. It also helps your borrower with his or her cash management – the lifeblood of any flip.
You would have to amend your note but it would take some pressure off your borrower, reduce your angst, and increase your return. If your borrower bought right and is experienced (if not, you shouldn't have made the loan – see above) you will get paid in full when they sell.
Years ago, not long after we began lending, we had an experienced borrower who didn't always pay us on time on his flips. We had a conventional lender long-term mindset that all loans should have a monthly payment and this was driving us crazy. Why? I don't know. What would we do with the extra $3000 each month over a six-month loan?
Better to let it grow at our current rate and keep our bank balance as loaned out as possible and working for us. If we had to make monthly payments on a warehouse loan, or to investors, then things would be different, but we don't. Similarly, if yours is a long-term loan or you need the income to live and can't wait to be paid back in bulk, then obviously you should expect a monthly payment.
This has worked so well for us we now use it as a competitive advantage when we market ourselves. Not surprising, we've never had a borrower turn this option down. In addition, we've easily done 50 loans with that borrow, who has become very successful.
@Andrew Michael @Jeff S. Andrew and Jeff: thank you so much for the suggestions. Yes, 15 day grace period is too long. That was one of our earlier deals and now all our deals are 5 days. She is an experienced investor with many properties (never verified), but she is not well organized at all. This is not a flip property, it is a fix and hold for rental. I will talk to her about the options you mentioned. Again, thanks.