When you buy loans and start the workout process, you’ll find that loans will fall into one of these five categories.
1. The borrower can start paying. This is obviously a good thing. Most times I get a borrower that almost breathes a sigh of relief when I finally contact them. It’s as if they know they owe you the money and were just waiting for that phone call. Whether the borrower can pay the full amount or a portion of the monthly mortgage, your goal here is to get back your capital outlay as quickly as possible.
2. The borrower can’t pay anything. The object with workouts is two-fold. The first is obviously to get the borrower to start paying. This sounds easy, but it’s not. We’re having to change the way the borrower has been thinking for a very long time. It’s as if he’s convinced himself that they don’t really owe you the money. Our main objective here is to get them from “non-performing” to “performing”. We need to take baby-steps when trying to change their mindset. Even if it means starting out them out at $50 per month for a six-month period. At least they’re paying something and at the end of the trial period, you try to get them to come up a bit for the next 4-6 months.
If a borrower refuses to pay anything, you should re-evaluate the situation and decide whether you should do nothing and hold onto the note for a while, start foreclosing or try to sell the loan.
3. You can’t find the borrower. No matter how hard you try, no matter where you look and who you call, you can’t find the borrower. It happens and when it does you must decide if you want to not do anything and see if the universe will intervene or go the legal route and foreclose, which will protect you in that you did try to locate them.
4. The first mortgage is foreclosing. No matter how much research you did before you purchased the note, there’s always the chance that some time down the road, the borrower, for whatever reason will stop paying their first mortgage. In that case, the first will usually foreclose on the property and more often than not, there will be no surplus funds for you to enjoy and you will end up losing your initial investment for the cost of buying this loan. YOU LOSE! It’s just part of doing business and part of investing in the distressed second mortgage market. Get used to it. The fact is that even with you losing out on these situations, at the end of the day, you still are making money!
5. The borrower wants a settlement. Obviously, along with the borrower paying, this is the best situation to be in. Here it’s a matter of negotiating with the borrower and honing your poker skills to get the best deal while getting the borrower feeling like they also got a great deal.
Remember, whether you buy 5, 50 or 500 loans, the percentages for each of the five categories should fall within the same range and percentages. If you find one category is much higher than it should be, you need to drill down and start looking at the loans within this category to try to find why the percentage is out of norm.