Awhile ago I mentioned some scenarios (exit strategies) that can be put into
place in order to turn a profit on a non-performing note.
Essentially, there are six possible scenarios with some variations and some possible overlap. Here are the exit strategies.
- Wholesale the note to another investor. This is usually done within a day or two of negotiating the purchase of the note.
- The next three options presume the property is occupied or the borrower intends to occupy the property. Once contact has been made with the borrower you might first want to negotiate a short sale and get the property sold to both relieve the borrower of the debt and earn a profit for you.
- You buy the note then work with the mortgage holder/borrower to modify the loan. Usually this involves the borrower making some form of regular, negotiated payments (negotiated with you or your servicing company). Most often you will be able to offer the borrower reduced payments, perhaps minimizing or limiting previous delinquencies. Perhaps you will qualify the borrower for an FHA 1023 loan which can offer even better terms to the borrower.
- Once the loan has been modified and the mortgage holder has established a monthly payment track record (usually 6-12 months) the non-performing note becomes a performing note which you can either hold onto and continue collecting the payments or it can be sold to an investor who purchases performing notes/loans
- If you are unable to negotiate a modification of the loan the next possibility is to offer the buyer the option of taking the deed off his hands in order to avoid a foreclosure. Sometimes this is done by offering to pay the borrower’s moving costs, or some incidental debt, etc. in exchange for the deed and the keys.
- The final option and the least desirable because it is time-consuming and usually results in the smallest ROI, is to take the note to foreclosure. This can often be a long, tedious, and painful process for everyone concerned.