GDNIP Ep 50: Taking Legal Actions Against Unresponsive Borrowers

Celebrating a milestone, Chris and Gail are now in their 50th episode where they discuss legal matters as well as breaking up with realtors. The real estate world entails a lot of legal aspects in the business, and it helps to know how to take these situations head-on in order to work well with borrowers. Together, Chris and Gail outline the steps in dealing with various legal situations, most especially those who have a note and needed to take some legal actions against unresponsive borrowers and/or renters. They go in-depth about letters, door knockers, Cash for Keys, and more.

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Gail Anthony Greenberg & Chris Seveney Taking Legal Actions Against Unresponsive Borrowers

Taking Legal Actions Against Unresponsive Borrowers

This is not just another episode of the show. It is our 50th episode.

I remember when it took us a while to get our first show done. I look back at our first show and probably how awful it was. We couldn’t have done it without everyone out there reading. Thank you. We have pretty much already hit our goal for downloads. Things are going very well for us.

We get a lot of great feedback from everyone. We appreciate it. Keep those comments coming. It helps us to know what it is that you want to know and what you want to hear us talk about. It’s a very exciting place to be. I host international students during the school year. Two of the three of them have left. I feel like I’m in this blissed-out state of mind. Things can’t get any better.

I’m glad that things are going well for you. On my end, I have no complaints.

You sent me the cutest dance number that your son was in. It’s You’ve Got A Friend In Me.

We try and diversify our kids from sports and every different thing. He’s taking some dance. He does a mix of different types. It was tap. I had their three-hour long recital, which he was in it for three minutes. My son is a little bit timid and shy. He was deathly afraid to be on any type of stage. I’ve convinced him, and he plays soccer and other sports, that being on a field is the same as being on a stage. You’re performing and people are watching you. It’s worse being on a sports field because you’ve got parents telling you what to do. In other types of activities, you don’t. I explained it to him like that and told him, “Enjoy it. Don’t be nervous.” He listened to me. He loved it. Afterward, he was like, “I wasn’t scared. I had so much fun.” The biggest point for me is he went out and he had fun doing it. Like note investors, I want you to get over that leap and don’t be afraid.

Get over the terror.

It’s fun but not all the time.

After that, I never would have guessed that he was nervous. He had great stage presence. He was also surrounded by lovely young ladies. This is clearly going to be a fertile ground for him when he starts noticing girls.

We got time for that.

Chris, what just happened?

I will continue on my epic journey of doing my first rehab and continue to give people updates on that. In the last episode, we talked about how I was going to have a home inspector go in to also take a look at putting a detailed list of things and take a look at the roof, which I had replaced. I did have other people look at the roof. They said it looks great. I used a reputable contractor who gave me a five-year labor warranty and shingles with a guarantee for twenty years on it. I wasn’t too concerned with that. I’m also having this property listed for sale. My agent had somebody look at it. They took the key to the lock box and didn’t return it. When I had a plumber and others stop by this morning to give me some more bids and to do some work, they couldn’t get into the property. It’s another frustrating step in this process. I’m not enjoying it. The reason why I typically don’t do this is that it’s not enjoyable.

Didn’t I promise you rainbows and unicorns if you’re going to renovate a house from afar? It’s fun.

Most legal, even for a contract for deed, is going to cost you at least $1,000. Click To Tweet

I’ll continue on sharing my journey on this asset. I’m in the process of trying to work something out with the realtor to go on different paths.

Do you want to break up with her?

It’s not working.

She’s going to steal your key and not even sell the house.

I think it’s best to move on and go from there.

Is breaking up with a realtor better than breaking up with a girlfriend or is it similarly angry and contentious?

I haven’t gotten there yet. I’m doing it over text, whereas I never had to break up with any female over text before. They didn’t have that back in the day.

I broke up by text with a realtor that was working for you and me on a house. I could sense the relief coming through. All I said was, “I think we need to go a different way. What’s the process?” He goes, “I’ll send you a mutual release,” within seconds. We can say it’s a mutual thing. What happened to me was I bought a triplex that is not a legal triplex. This building, which is in very bad shape, was bought at a tax sale by someone who held it and seemingly did nothing. He said he did things. At the closing table, he whined a little about having done things. It would be hard to say what he could have done because everything needs to be done in this place. The thing that is nice about it though is it is already metered for three units. Yet, it is still in the zoning for the city, a single-family home. Normally, it would be a situation where you would be like, “Do I go ahead and keep running it as a triplex or do I go and apply for a zoning variance?” I paid little for it and it needs a ton of renovation. For me to invest that money, I need to go get the zoning variance. Go, legal.

I’ve said the word legal because that’s our main topic. I don’t know about you, but I’m up to my neck in legal matters. I am someone who tries to solve everything. I believe in a perfect world where everyone agrees and we all get along. It was always my goal in becoming a note investor that I would find these great win-win solutions. My website is even called WinWinNotes.com. I am finding it’s not always possible. I had someone tell me at the very beginning of my note investing career. He was a more experienced person. I said, “How do you handle your notes?” He goes, “I start legal on everybody right away as soon as I buy it.” I was horrified. I thought, “That is so cruel and unusual. Where’s the hope and aspiration? You’re not even giving them a chance.” Now that I’ve been down the garden path with a number of borrowers, I’m thinking, “That’s probably not a bad tactic.”

I finally completed the biggest legal dispute I’ve had. It was a note that was past its due date. We’re working towards a resolution on the statute of limitations and so forth. The borrower got an attorney involved, which we’ve come to a final resolution on, which is good. That one took a long time and a lot of money being spent in it. The legal in this business is part of the business. Some people and some funds will refuse to foreclose on a borrower and others don’t have concerns with that. It’s part of your business plan. Part of yours and mine is always to work with the borrower and try and get them on some type of payment plan or performing if they qualify for it. Sometimes you have to give them a little boot in the fanny to get them to the table to start having discussions with you. That’s where legal comes in many instances. I’ve got an email from somebody in my area who bought a note for me and was like, “What should I do? It’s a performing note they stopped paying. Would you mind telling me what I should do from a legal perspective?” I outlined some steps. Now would be a perfect time to start talking about this for people who have a note and need to take some legal.

Chris has a lot to say and has a therapeutic need to express and vent about some of these things. The question is, “When do you do legal? How do you know it’s time to do legal? How do you do legal?” There are a lot of details in there, some of which I was asking you, even though we’re both relatively about the same level of experience you’ve done with notes. You’ve done a lot more legal than I have. I keep getting mixed information from servicers about what I can and can’t do. It seems to have more to do with their rules than it does with the states and their requirements. First of all, what were the main questions that JV had for you? How did you begin to advise him?

First off, I am not an attorney. I don’t believe Gail got her law license either. We both want to state that we are not attorneys. This is not legal advice.

We’re Note Investors. We have a borrower who is not complying. I haven’t started legal because at the beginning of the relationship, the borrowers are generally a lot more responsive, willing and compliant. It feels very hopeful at the beginning. Even borrowers who end up defaulting after a good start believe, in the beginning, that they’ll be able to do it. All of my legal things happen because I had initial discussions. We got on a mod. I asked for legal to be started on two people. One is a note that I created. The borrower seemed great and super interested in the house. They’re on a land contract in Michigan that I originated in a house that I bought. The people are very invested in the house. They’ve made all kinds of improvements on it. They’re enjoying a lifestyle that is different from being a renter, where if you’re a little late or you skip a month, no one comes to drag you out right then and there. You don’t get eviction papers immediately. People who have been renting a long time can’t easily adjust to the self-discipline of being a borrower instead of a renter.

For legal, there are two times when it occurs for me. One is when the loan gets boarded. After the Hello letter goes out within about two, three weeks, if the servicer has reached out to try and get communication with them and if there’s been no communication after 30 days, I usually will send a door knocker. Some people are like, “Why waste some money on a door knocker before sending a demand letter?” I like to send a door knocker first. If they’re nonresponsive to the door knocker and I’ve had this asset for a period of time, I will send the demand letter. The other instance is when you get somebody on a mod or they start paying again. Typically, there’s some type of agreement at that point in time that is in place, whether it’s a trial payment plan or verbal, whatever it is. In that part of the agreement if the people miss a month or they’re off by a week, in most instances I’m not going to turn around and just start legal because of that. Typically from there, if it’s 60 days from that period and they go dark as well, that’s when we’ll start to get legal involved. Each case is very different. For a general rule, that’s how I manage my assets.

I can’t tell you how many times I’ve had someone give me some money up front to be given another chance to perform well and have their loan modified. I’ve had people give me as much as $1,500 or $1,000 only to pay one or two more months and then stop. You think like, “Were they planning to stop? Why did they give me $1,000 if they knew they were going to fail in a couple of months?” It’s hard to understand the mindset of borrowers. I have a young man in Michigan. He is so pleasant. He ma’ams me to death. I picture this incredibly clean-cut guy when I’m talking to him on the phone, which I have often. He calls me to tell me he’s about to make a payment and that he’s going to send me a photograph of the money order when he does. Two weeks go by and I realize, “I never got that photograph. The servicer didn’t get anything either.”

There’s always this feeling like, “He didn’t do what he said he was going to do before, but now it sounds like he’s going to. Maybe I can hold off for a little longer.” This guy has gotten two and a half months out of me that way. I’m always expecting something and it doesn’t happen. He texted me he’d be sending $600. He’s six months behind and I’m like, “I’m not waiting.” I was writing an email to our favorite Michigan attorney saying, “We need a demand letter sent to this guy.” I am curious about why you send a door knocker. That seems like an extra expense to me for someone who’s already looking sketchy. You can either spend the money on that or the demand letter. Why do you do that?

On many instances, I will put in the door knocker and have them also include a Cash for Keys. That way, you know they’ve got it. If you start legal, they can’t say, “I didn’t know the loan was sold. Nobody ever told me.” I’ve had instances where when it comes down to being in a court, they will mention that they weren’t aware that the loan was sold. They don’t know who this person was. A lot of times, what will either be included is a Cash for Keys deal, a shock package, which includes an application for modification, along with another copy of the Hello letter and the Goodbye letter and a copy of the deed or a copy of the assignment that shows these people own this.

That makes a lot of sense to me. We should try and say this in order. When we take over a nonperforming loan, we always send our own welcome letter which is, “I’m your new lender. You will be getting official paperwork from both your current servicer and the new servicer telling you the new payment arrangements and where you should send your payment. In the meantime, we want to introduce ourselves and say that we are very interested in understanding more about your situation and your goals with the house. Here is the information that we have. This is your payment per month. This was when your last payment was received. This is how much you owe.”

That is a great idea if anyone reading has not heard us talk about that. One of the first things that happen with that letter is that if someone has made payments in the transition time between when you bought the loan and when it transfers to your servicer or if the former servicer’s records were wrong about when and how much they last paid, this will get an immediate response. I did find out through one of these that someone had made a payment of over $2,000 after I bought the loan, but before transferred. That servicer had not transferred the money and had not alerted me that there was money there. This is a very good thing to do.

It also can give you your first hint, if you don’t hear from someone, that you might have an unresponsive borrower, not necessarily because some people are there, they want to play ball but they’re not, for whatever reason, going to answer you. You go to the next thing, which is an outreach. Someone’s calling them to find out what’s going on. It could be you. It could be your servicer. It could be an independent person, a third-party person. We did a whole episode about calling borrowers. Do not call a borrower unless you listened to that. Even then, understand that we are not lawyers. We’re not advising you. We’re telling you what the best practices potentially are for calling borrowers.

One thing I want to mention about the letter that we send out is we are not requesting them to make a payment. That’s the big thing that you do not want to put in that letter. You’re not requesting or demanding payment. You’re just letting them know that the loan has been transferred.

You’re open to a conversation and here’s the accounting that we have. Outreach begins. If you don’t get a response and outreach, you send a door knocker. I would not have thought about this, that idea of sending that paperwork along, including a Cash for Keys offer. When you think about it, when you start legal, it costs very little for the first volley, which is the demand letter. Most attorneys will only charge $75 or $100 for the demand letter. You can’t send the demand letter in the case of a contract for deed unless your deed has been recorded and you are the deeded recorded owner. You have a little time to think about what you’re going to do and to try some other outreach things. It’s interesting the idea of sending a Cash for Keys offer because I always assume everybody wants to keep their house. If you’re going to do legal, it might cost you the same amount to offer them $1,000. Most legal, even for a contract for deed, is going to cost you at least $1,000. If you think about it, it makes a lot of sense. Go ahead and offer them $1,000 and see what they say. What does your Cash for Keys offer looks like? Do you name an amount? Do you just let them know that you’re willing to discuss it?

Usually, I will put an amount in there. It’s not $1,000. It’s usually $200 to $500 that offer them contingent upon an interior inspection of the property. Before I offer them anything, I say, “I want to go inside this property and take a look at what it looks like on the inside because I don’t want to give somebody money who has completely destroyed the place.” I don’t know if you saw the picture on Facebook. They may have even mentioned something Cash for Keys, but it was a picture of a cow in a doorway inside a house. The house was filled with mud or something else. Somebody took a house and converted it into a barn for a cow. The comment was something like, “What was your Cash for Keys offer?” I should download it.

We have experienced with poop inside the house, so I could see that happening.

The poop inside the house was on a bucket list, no pun intended.

You offer a modest amount. Do you find that people respond? Do they respond and ask for more? What normally happens when you toss that out there?

Usually, it is rejected.

It’s pretty astonishing that borrowers can lose so much over so little sometimes. Click To Tweet

Do they let you know, “I’m rejecting your offer, I want to stay?”

They typically will say they want to stay, at first. They’ll reject the offer.

My typical thing is that I try to connect with the borrower. Often, I do connect with the borrower. Often, there is some agreement whether it’s a formal written-down agreement or they just agree they’re going to start paying, “I’m going to send you this much by this date. I’ll be doing monthly. Everything will be cool.” I have not always memorialized those as modification agreements. I just wait and see if they’re going to do anything. I’ve noticed that you tend to be more formal. You do create a mod as soon as you’ve got a verbal agreement with a borrower. Are there advantages to putting that down or does that in any way hurt you? If you do have to go to forfeiture or foreclosure, does it complicate matters that you created a mod that they defaulted on?

It depends. Sometimes I’ll do trial payment plans. Other times, I’ll do mods.

Tell us the difference and why you would do one versus the other.

If the person was three years behind or if there was an instance where they may not think the amount owed might be incorrect or it’s questioned, typically what I’ll do is a modification. A modification resets everything. It says, “The total payoff arrearage is $6,000. You think it’s $4,000. We’ll do a mod and we call it $5,000. If the UPB was $25,000, it’s a new modification. Now it’s a $30,000 UPB. Here are the payments. Here’s where things stand.” In other instances, somebody might be six months behind or four months behind. They’re like, “I want to pay an extra half of payment every month for the next year.” In that instance, I wouldn’t do a mod. I would do either a trial payment plan or allow them to keep paying, which is like, “It’s a trial plan that leads up to modification.” In most instances, I usually start off with a trial payment plan. In some instances, I may go right to mod. It varies. From a legal perspective, it doesn’t matter when you’re getting into the demands and stuff like that.

You could sit back if you want it to be passive and see what they do. You don’t even have to do borrower outreach. You could just buy the loan, wait a couple of months if they don’t make any payments and start legal. That’s my friend, starting legal immediately. It takes a while anyway to get the deed and get the deed recorded and everything on a contract for deeds. You might just wait and see what the borrower does once they are alerted of a change in the servicing. I would not expect this ever to happen again, but in a situation where I was very interested in owning the house myself, the borrower was fourteen months behind. When she got the Goodbye and Hello letters, she made a $6,900 payment. Nobody said anything to her. I think she thought, “I’ve been riding this long but there’s a new person. Let me go get what they’re going to ask for, which is everything.”

I work off called critical path scheduling. Something can slide but nothing can happen until this happens and so forth. With legal, you can’t do anything unless you’ve recorded the deed if it’s a contract for deed or recorded the assignment on a mortgage on a note.

You have to have legal standing.

It has to be somewhere in public record, that you have the right to do this. Sometimes people forget or take a long time to record the deeds and stuff. When you go to start your legal, it causes the biggest delay.

We had that. You and I bought a contract for deed in Ohio as part of a pool. We did not specifically go out to buy something in Ohio since we rail against it almost daily. I did not realize that the land contract had not been recorded by the two previous deeded owners of this house. Nobody ever did anything legal because I have to record it. It’s one of those little Ohio counties that don’t allow you to e-File. They do allow you to e-File other things but not land contracts. I’m not sure why that would be. It’s like, “Bring us your deeds. Shoot anything else you want over here but not a land contract.” I hope they don’t drag their feet because this is a situation where we need to move forward. You have that little breathing period where you haven’t got your own legal recordings done yet. You can’t do anything because you’re not the official lender until those things are recorded.

Once you are the official owner, what is the first thing you need to do or provide to your attorney in regards to sending out the demand letter, which is the kickoff? In many instances, a contract for deed will have language that if they stopped paying, it turns into them as a tenant on a month-to-month lease. That typically will not stand up in court.

I have never had one where the attorney looks at it and goes, “They’re a tenant. You don’t have to do anything. Evict them.” I don’t even know why that was even put in there. I don’t think it was ever enforceable.

Unresponsive Borrowers: With legal, you can’t do anything unless you’ve recorded the deed.

A point in time, it may have been.

There’s a fair amount of sentiment, and perhaps rightly so that lenders creating contract for deeds in the past were fairly predatory. They stacked the deck in their own favor against borrowers’ basic rights. In most states, with a contract for deed, they don’t even have to be that far behind in their payments. They don’t have to have massive arrearages. Many states will, if they don’t bring their loan completely current during the legal process, they’re going to give you the house. It’s pretty astonishing that borrowers can lose so much over so little sometimes. Sometimes they don’t even owe that much. They lose sometimes properties with a lot of equity in them. We can all whine about the rules that we have to live in. There have been new ones coming out about land contracts. When you step back and look at it, it’s a deal for us as investors. I’ve gotten tremendous benefit from selling houses that I bought for modest prices and sold much higher.

No kvetching about your unenforceable tenant language in your land contract. You’re going to have to spend some money. You are going to go through some stuff. It’s still going to be an incredible deal for you. I’m selling some performing CFDs. I’m selling them at a 15% yield, which is fair. It’s high by the standards of normal notes, which you would sell at a 12% yield. With contract for deeds, they’re a little dicier. I want to be generous about it too. A lot of my buyers are new. I want them to feel like it’s a juicy deal that they’re having for snowed experiences. In a way, it’s like you’re saying, “You sold a performing CFD that has stopped performing. The JV is asking you for help.” That JV did not come back to you on a rampage like, “You sold me this performer. Now it’s nonperforming.” That JV is looking forward to a whole new adventure and potentially a very lucrative one where he’s going to be taking back that property and exiting in some way. That’s probably going to be pretty good even it stopped performing. It’s good and you should, in a way, not care whether they continue to perform or not because of the way we buy things and the prices we get on them. You’re fine either way.

Taking back the property on this one would be more lucrative based on what the property is probably worth, versus what the UPB on it was. The UPB was under $10,000. It will do well. He reached out to me and asked me.

You asked, “What do you have to give the attorney?” You have to give the attorney the reinstatement report. Some want the whole pay off report, but that’s usually more for foreclosures where that would bid.

I provide both. I pay a reinstatement report. It’s going to be a minimum of 30 days. I usually provide it a little longer, in case it takes them a few days to get the letter out. That is a reinstatement letter. Let’s say today was June 1st. I would put it to July 7th. That is in the amount that they have to pay to make the loan current up through July 7th. It’s past payments. It’s any arrearages. It’s any advances. That’s what that payment is. The total payoff is taking the UPB, unpaid principal balance, and adding any other costs involved in that as well, including any other legal you spent or advances like having to pay the taxes if they’re not paying for taxes, so you have. That’s all collectible. Those are the two things. Another is they typically ask for the borrower’s Social Security number. They will run a bankruptcy check to make sure they’re not sending a demand letter to somebody in bankruptcy or they will skip trace it and look it up themselves. It depends on the attorney. They’ll want to see a copy of the recorded deed or assignment in your name as well. Those are the primary items that they will be looking for.

Do you find that they also want the Social Security number to do a military check?

They’re doing that as well.

There are rules against bringing a forfeiture or foreclosure against an active-duty military person. He might be deployed abroad or whatever. They have to fend themselves while they’re defending the rest of us.

This is the initial phase and how to get a demand letter, which kicks off this process. In our next episode, we’ll continue on what happens after the demand letter goes out. We would like to thank everyone for reading the 50th episode of the Good Deeds Note Investing Podcast. Please leave us a review at iTunes and Stitcher. Also make sure to go to our website, GoodDeedsNoteInvesting.com, and sign up for our webinar and emailing list.

We would love it if people would also leave comments.

Thank you all.