Buying non-performing loan notes can be incredibly profitable, but what happens when borrowers are consistently late on mortgage payments?
Step 1: Get it in Perspective
Constant late payers can be extremely frustrating to note holders. Sometimes they can be expensive. However, this does come with the territory, and often it’s more about having the right perspective than anything else.
You can make a lot of money buying a non-performing loan, but you go in understanding that the borrower hasn’t been paying on time, and that’s why you are getting such a good deal. So first it might be best to ask what you did to cure the situation when you took the note over.
Firstly, did you modify the loan? If not, why did you think the borrower would magically start paying on time and all of a sudden be able to make timely payments?
Secondly, look at the reality of the situation. Is this a property owner which is simply a little behind each month. If so, it may be annoying, but may not really affect profitability. Just deal with it, and save yourself the stress and expense by resigning yourself to the fact that this is how it will be. Besides, you’ll probably boost returns on late fees.
If they are falling into real default and are seriously delinquent, is this something you can cure? Can you expect they will be able to pay soon, and if not, what options are available? Will you really lose if they fail to pay, or could you actually come out as an even bigger winner?
If the property is appreciating, and you got a discount on the note, you could stand to win a lot, even if the cash flow isn’t as consistent as expected.
Often the best move is to have a conversation to get a real handle on the situation, without committing to anything, until you’ve talked it over with your attorney.
Step 2: Analyze The Options
If the loan is simply unaffordable to the borrower can you modify it to bring it back to performing and still earn a reasonable rate of return?
If not can the property owner refinance or sell the property and pay you off?
What will happen if you do nothing? It there a maturity date looming that will push them out anyway without you having to do anything? Can you afford the holding costs, property taxes, and insurance until this date?
If you foreclose, how long will the process take, and can you afford the holding costs, property taxes, and insurance until this date?
Step 3: Choose Your Exit Strategy
- correct the situation and remedy the note?
- foreclose and cash in bigger, sooner?
- motivate the borrower to find their own exit and pay you off?
- hold tight until it fixes itself?
- simply sell the non-performing loan on to another investor?
What should you do in order to provide valuable help to homeowners and the economy, while protecting your own nest egg and legacy?