Oct. 27th, 2019

On this episode we go over the most common exit strategies that are involved with a non-performing note. The first exit strategy would be to get the note to re-perform.  Basically, this means you’re able to get the borrowers to start making payments again.  This happens quite a bit and is great for all parties involved.

The second strategy is called a Loan Modification.  A Loan Mod is when the lender and the borrower are able to agree on new terms for the loan.  This could be a reduction in Principal, Interest Rate, or Arrearages.  The Loan Mod could also extend the payment timeline further out into the future.

The third exit strategy is to sell the property if or when it becomes an REO. That’s a real estate owned property, which means that banks now owns it and you’re usually going to get that back through some type of foreclosure or negotiation. In this situation you have the physical property and you’re usually going to try and sell it.

The fourth exit strategy is going to be cash for keys or deed in lieu.  In this situation you get the property back by having the borrower deed it back to you and/or give up any legal claim they have.  Sometimes you might help this process along by giving the borrower some move money.  If you do give them money make sure the property is ready on time and in good condition.  The last thing you need is for the borrower to get your money and not fulfill their end of the bargain.  This can be a very good strategy to get the property back without having to ruin the borrower’s credit or go through a lengthy foreclosure.

The fifth strategy would be to foreclose on the property. Hopefully you’re not having to do this too often, but it does happen and that’s where you’re going to take legal action to get the property back and get the borrower out.  This isn’t fun for anyone involved and can use up a lot of your time, energy, and money.

The sixth strategy would be to wholesale the note.  You could try and do a quick flip to another investor.  You’ll need to buy the property for a very good price that way you’ll have a profit spread after selling it to another investor.  I don’t usually recommend do this unless you’re buying pools of notes.  I would never intentionally buy a single note to try and perform a quick flip.  There’s too much risk and not enough money.  I recommend focusing on other strategies unless you just really need to get rid of an asset.

The seventh strategy is to sell a re-performing note and this is our preferred exit strategy, which is why it’s lucky number seven on the list.  In this situation you need to have the note perform for 6 to 12 months.  After the note has been “seasoned” it can be sold for a much higher percentage than what it was bought for as a non-performer.  Typically you can sell a performing note for around 85% of the current Un-Paid Balance depending on the collateral and note terms.

 The eight strategy is to turn the property into a rental.  If you got the physical property back, whether it was through cash for keys, or deed in lieu of foreclosure, you can now turn the property into a rental if you wanted to.  I have never done this and I don’t plan on doing it unless it was a commercial property.  There’s just too much of a hassle trying to manage a bunch of single rentals spread across the US.  Besides I thought we all got into Note Investing because we didn’t want to deal with Tenants, Termites, or Toilets.

The ninth strategy is to write a new note for a new borrower.  You can only do this if you get the property back, but it can be a very profitable strategy.  You won’t have to worry about trying to rent it and it can create high yield long term cash-flow.  After 6 months to a year you could turn around and sell this performing note.  As you can see a lot of these strategies flow into and from each other.

The tenth strategy is Sub2 (Subject To The Existing Mortgage) and you’re not going see too often.  Basically, you let someone else assume the payments of the note.  You need to be very careful if you do this because if you’re going to let the original borrower off the hook, then you need to make sure that the new borrower that’s taking over and actually pay because there’s no point trading one borrower for another borrower if they’re both bad. If you can, try and keep the both borrowers on the note until the note matures.

The eleventh and final strategy we’re going to talk about is a short sale. A short sale is when you let the homeowner sell the property for less than what is owed.   You can approve that pretty easily since you’re the bank and not a bloated bureaucratic mess.  In these cases you’re usually buying at a significant discount because the note is non-performing. This means you can afford to give up quite a bit of the Un-Paid Balance because you’re going to be paid quickly.  This can result in avery good profit, especially since the borrower’s probably not going to trash the place now because you’re basically doing them a favor.

And that’s it. We covered the main exit strategies for non-performing notes. As you can see you have a lot of options and flexibility when it comes to exiting your non-performing note deals.  Please let us know if you have any questions and we’ll have more in-depth content for you soon.