February 07, 2011
Where Do I Sign?
Every once in a while I get a phone call out of the blue from someone at wit's end, unsure of who to talk to or even if they can trust what they're being told by other "experts" in this business. Last Friday, I received such a call.
My caller recently purchased a non-performing note, with a farm as the security, from a local bank. So far, so good. She was currently deliberating whether or not to start foreclosure proceedings. Since it did not appear the borrowers were going to vacate voluntarily, nor put the property up for sale, I told her that was probably her best bet. Then came the swerve.
Her subsequent question was if the property went to tax sale, wouldn't she only be entitled to what was owed to her if a third party bought the property? Well, yes, but then she would receive payment in full and realize the discount... - - - SILENCE - - -
"Discount?", she asked. As I started in on my spiel about the discount being the difference between what the borrowers owed on the note and what she paid for it, she interrupted and informed me she paid the bank the full amount of principal owed on the note. Now the - - - SILENCE - - - was from my end of the phone.
Finally, I overcame my shock and asked her to clarify. "OK - so you purchased a NON-PERFORMING note for 100% of the balance owing. WHY would you do that?" Her answer was innocent enough - "Well, the borrowers only owe about 50% of what the property is worth."
Now, my first impulse was to ask her if she wanted to buy any more non-performing notes at par, as I have several I suppose I could part with at that price (sarcasm included free of charge). Instead, I gave her the best advice I could think of at the time.
Instead of foreclosing, I suggested she ask for a Deed-In-Lieu of Foreclosure from the borrowers. This would protect the borrowers from a nasty foreclosure following them around on their credit reports for the next seven years, and give my caller the ability to easily get the property into her name and on the market to sell. (This is because my caller would have to report the foreclosure to the credit agencies - otherwise it would never show up, and most individual note holders won't (and don't know how to) report to the credit bureaus.)
Now, I know it's probably unlikely, especially if the borrowers really do have a high level of protective equity in the property, that they'll agree to a Deed-In-Lieu. However, the threat of a foreclosure on their credit might be sufficient to scare them into action.
For all you novice notebuyers-to-be out there - don't EVER buy a note without getting a discount!!! ESPECIALLY a non-performing note! Of course, I will make an exception to this rule if you'd like to buy some of MY non-performing notes...then you just need to show me where to sign!
Make it a great week,
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