After you buy a defaulted note, you could always contact the borrower and act like a traditional bank, but if you do, expect the conversation to go adversarial rather quickly. What do you expect when you tell someone, “If you don’t pay up, we’ll just Foreclose and you’ll have to get out…”?
Yes – but there is a better way.
Want the “magic formula” for talking to a borrower who isn’t paying his or her note. It’s simple, just ask:
- “What happened?”
- “Where are you at now?
- “What would you like to do?”
I’ve always had much more success – financially and emotionally – when I understood the financial situation of a borrower. Think about it, when you know your tenant has a good job and a happy home, don’t you worry less? Doesn’t that make you feel safer when you think about cashflow?
For us, the initial conversation with the borrower generally sounds like this: “Do you want to stay or go? I think I can help you with either decision. Look at me as your advocate. If nothing else, I think I could save you from having a foreclosure on your record.” I’ve always felt that it’s good to stress that “our legal department will be moving forward until something is worked out,” so the borrower knows foreclosure isn’t something you want to happen, merely that it’s the only option left on the table if there is no communication or if a favorable deal for both parties can’t be agreed upon.
If the conversation is strained in the beginning, we train our asset managers to say, “Listen, even if we agree to disagree, just give me five minutes to show you how I’ve helped other families in situations like yours and if you don’t want to talk to me after that I’ll never bother you again.” This usually gets the borrower to start listening, which is sometimes the hardest part.
Once a dialogue is established, we then proceed to go over some of the homeowners’ options by telling them stories of how we’ve helped other families, utilizing solutions like the following:
Nine Strategies To Help You Get Paid
- Discounted Loan Payoff –This is when you accept less than the face value of the note for a payoff. We always offer homeowners an opportunity to pay off their loans without incurring the additional late fees and penalties that have been added. An example would be, if you paid $20,000 for a second mortgage with a face value of $50,000 and you contacted the borrower by mail and said,” if you pay $30,000 in the next 60 days, the loan will be considered paid in full.”
This is a major strategy employed by low equity note buyers.The conversation with the homeowner might go something like this: “There’s a family I helped in Oregon where they were able to access their 401K penalty-free because they were in Foreclosure.” What if the person doesn’t have a retirement plan? Then we could say, “Maybe you’re qualified for the friends and family program.” Then I would go on to tell a story of a family in Delaware I helped where they didn’t have a retirement account, but the borrower’s uncle offered to pay the discounted loan payoff amount.
If they don’t have ANY friends or family that could help, the next option might be more practical…
- Reinstate Loan – The delinquent loan is considered reinstated when the amount of money needed to bring the past due loan current has been paid. This is also called “arrears.” Sometimes a partial reinstatement or discounted arrears plan is put into place with the homeowner. If they’re on the fence about putting money towards arrears, we point out that the more they pay off the arrears, the better offer we can make with length of terms, payment amount, etc.
- Payment Plan – Sometimes called a “Loan Modification” or a “Forbearance Agreement”. Many loans have more than one exit strategy and I describe this as “moving in all directions at once.” It’s better to employ several options to exit the deal until the first viable one appears. A typical plan example is a payment plus arrears like described above. This plan would typically spread the reinstatement amount over a defined number of months along with the regular or reduced payment.
- Refinance – Another typical plan instituted with a delinquent borrower is a full or partial reinstatement and regular or reduced payments with the goal of refinancing. This could take up to twelve months of re-performance and would usually require sufficient equity in the property. These plans come in an infinite number of combinations, but of course they all require that the borrower must be able to start making payments. If a refinance is not a viable option, you may assist the borrower with credit repair or by hiring an attorney to do a loan modification on the senior lien and help by providing a corporate advance.
- Seller Assistance – If the borrower can’t afford to stay in the property, you could assist them by helping to pay for the Realtor, a mover, a down payment or even rent for a new place. You could also allow them to stay in the property and buy them some time until the property gets sold. You could even pay the homeowner if they were to find you a buyer or tenant.
- Deed in Lieu of Foreclosure – If the homeowner cannot afford to stay in the property and there’s little or no equity you could offer them an administration fee, often called “Cash for Keys”, if they were to sign over their deed (their ownership rights) to you. The “Fresh Start Program” is when you provide them with a portion of their equity in the property, up front, as a means to make a fresh start and move on from their current situation. Please note this program is only available on the condition that there’s equity in the property. These types of programs can save the Homeowner from having a foreclosure on their credit.
- Foreclosure – This is when a mortgaged property enters into the possession of the mortgagee without right of redemption by the mortgagor, usually for reason of delinquency of mortgage payments. Many times you’ll initiate foreclosure to get a borrower to surface because it’s always better to exit working with the borrower. This is only used as a last resort to protect your interest. You can even work things out with the borrower after foreclosure in some cases. That said, all notes are purchased under the premise of having to use foreclosure as an exit.
- REO – Real Estate Owned, the final stage of foreclosure process when the bank or lender (you) takes back the property. Then you usually sell the property (“As Is”) to recover your investment. You can then try to liquidate quickly by contacting investors through a National REIA group (Real Estate Investor Association), or a BPO Realtor (oftentimes you can use the real estate agent who did the drive-by appraisal when you first bought the note) or REO broker (www.REOredbook.com is a great source we use)., If you want a top agent, you can use a Realtor with the CRS designation (Certified Residential Specialist – www.CRS.com, the top agents in the country).
- Sell the Note – Whether re-performing or non-performing, you can sell the note since it’s an asset and that’s always an exit. One of the best ways we’ve found to sell re-performing notes is by offering some type of warranty or discounts. You can find note buyers all over the country; some of the best places to go are local REIA or Meetup groups. There is also a large amount of buyers online with places like LoanMLS and a variety of LinkedIn groups. And like raising private money or investing in general, you can also create a market of note buyers simply by educating people of the advantages of owning notes.
So what options do you give the borrower? Comment below with tips and techniques you do!