There is an old saying in the note investing world, “You make money when they pay, you make more money when they don’t.” That phrase is often followed by advice that includes the judicial process that leads to foreclosure or land contract forfeiture. While these strategies are truly the most common in this current market, they are not the only options you as a note holder have. One of my more recent transactions was a reminder to myself and my company that we don’t always have to pursue foreclosure as the only option.
From Performing to Non-Performing
One of my recent business transactions included a small portfolio of performing notes. One note in particular was borderline performing at best. The homeowner has been living in the property for close to three years and the taxes and insurance were driving the monthly payment on their contract beyond the level where they were comfortable. It wasn’t long before I was staring at a non-performing note. We contacted our attorney and started the procedure for a forfeiture on the note. As this process was initiated, the homeowner started making small payments each week that were bringing in just enough for the escrow account and some interest. With the rising late fees, and negative equity being built into the note their efforts were not going to be enough.
At this point I decided to have someone drive the property to make it’s in good shape and confirm that someone is still living there. When I got a report back that everything looks great, the neighborhood is in great shape and several other positive factors, I knew the property would be worth getting back. Yet, instead of completing the forfeiture, I reached out to the homeowner and figured out a faster resolution that’s a win-win for both of us: In the course of the conversation I found out that a family member was out of work during the time they fell behind, and now that he is back to work they are doing everything they can to catch up. Knowing this information and their payment history (here is where great recordkeeping comes in) I gave them this proposal.
My Exit Strategy Proposal
If they agree to forfeit their right to the land contract, I would re-write them into a lease at a lower dollar amount per month (one that made sense for both sides). I would forgive the amount owed in arrears and give them an option (with a fixed term) to buy the property from me at their current balance if they could secure 3rd party funding. They couldn’t have been happier. The homeowner told me, this was what she had hoped for, for over 6 months.
What should makes this actual scenario interesting to all note investors, is that if you can identify a better win-win scenario when someone falls behind in payments, you can come out ahead. In this example I knew the property was in an appreciating market, the homeowner wanted to stay and was making an effort to catch up on her payments. I knew that if I merely went through the court proceedings, I would have a property sitting vacant for a period of time with some repairs and re-marketing. I now have a solid hold on the asset, and the homeowner still has a chance at true homeownership.
One final thought. This is not a strategy to employ in most situations. Only when you are fully confident in all aspects should you employ this strategy, otherwise it could result in more pain, and lost revenue for you and your growing business.
Photo: Sherab Wongmo