Spoiler Alert: The items on this list cost note investors time and money!
When I was trying to come up with a blog subject this month, I literally sat in my home office and tried to recall recent conversations that I have had with my note investor friends. I tend to gravitate towards the negative so what came to mind were relayed examples of dumb things that investors are doing. So that is what I am presenting here – this prestigious list of four. Before I begin, I would like to extend a tip of the cap to those who helped me craft the list, and you know who you are. This list probably could be larger (as investors are doing a lot of unnecessary things) so maybe I’ll write a follow-up next year. This list does not contain items you may have heard before – paying gurus five figures for note education, buying assets too high, cutting corners on due diligence, or even basic business ethics like being above board and transparent with your OPM investors. No, I am not writing about any of that today. After all, I believe that most note investors do know how to run their businesses the right way but choose the alternative out of self-interest and greed. Instead, this short list includes the things done because they do not know any better. Experience, as they say, is a great teacher. They may eventually learn some of these lessons, which are arranged here in no particular order of importance.
- Changing note servicers midstream. We all know that servicers are not created equally. And it is natural for an investor to have a favorite servicer. However, that doesn’t mean they should use that servicer each and every time they take ownership of a note. Here’s a scenario. Let’s say there is an existing note on which the borrower has not made payments for a while. Investor A (and his servicer) reach out to this borrower and after a few months of back-and-forth, the borrower agrees to a temporary forbearance agreement. The borrower is required to make payments for 6 to 12 months. Then, after successfully completing that plan, the borrower would sign a permanent forbearance or loan modification. At the same time this is going on, Investor A sells this loan to Investor B. He informs Investor B of the forbearance plan at the close of the sale. Now, Investor B for whatever reason dislikes Investor A’s servicer and wants to board the loan elsewhere. Although it is Investor B’s prerogative to do so, he also has to realize that changing servicers midstream like this could jeopardize this new income stream that he did not have to put in work to get. Delinquent borrowers, especially those who have gone dark, are temperamental people. Or said a different way, getting long delinquent borrowers to start paying again can be a delicate process. From their perspective, they neither know nor had business dealings with Investor B or his servicer. They have only dealt with Servicer A. Then they get goodbye and hello letters directing them to start paying Investor B’s servicer. It simply is too confusing. And that confusion can lead to that borrower going dark again, or possibly continuing to send payments to Investor A’s servicer. So, Investor B will either have to start the negotiation process all over again or have to wait a few months before he starts receiving payments. All of this could have been avoided by not switching servicers at that juncture. Once the reperforming loan gets seasoned for a few months, then it will be appropriate to move the loan over to a different servicer if desired.
- Not foreclosing soon enough. When investors get into the note game, many have the most honorable intentions. They simply want the cashflow and do not desire to kick people out of their homes. For them, foreclosure is THE ultimate nuclear option. As weeks and months go by, they hope against hope trying to work with a borrower who has zero interest in operating in good faith. Well, if you are this kind of note investor, I got a newsflash for you! Foreclosure is not just AN END. It can also be used as A MEANS TO AN END. An investor can use foreclosure to bring an intransigent, ignoring-all-calls-and-letters borrower to the table. Why? Because it signals to the borrower that the loan holder finally means business after months or even years of receiving late notices in the mail (or nothing at all). There is nothing quite like the real threat of being removed from your own home. So, one tends to take that seriously. Now, the investor must be prepared to actually foreclose if the borrower forces his hand. But don’t forget that an initiated foreclosure can be stopped if the borrower decides to play ball. Or, once you discover that the borrower is in either of the “cannot afford to pay” or “refuse to ever pay this loan” boxes, go ahead and complete that foreclosure!
- Pursuing only 1 exit strategy. I’m gonna be honest here and say that my primary M.O. when I entered the NPN space was foreclosing and taking the property back. Full Stop. Many other investors also come into this space with this similar one-track mind, and they should not. Why? First, they need to realize that their exit strategy is really not up to them. A lot of it is up to the borrower and how they want to proceed. Second, having a singular exit strategy nullifies why most note in the first place – all of the exit strategies that are available compared to other real estate investing strategies! If owning the real estate is your sole strategy, just remember that foreclosure can take anywhere from 4 months to 3 years to finish. During that time, you could have actually (just an idea) talked to the borrower and worked out a payment plan that puts money into your pocket much faster. After all, time is money, and the velocity of money is king in any form of investing! During your due diligence phase before purchasing a note, you should map out all of the likely exit strategy scenarios and perform your ROI or yield calculations on each. It is fine to have a preferred exit, but you SHOULD NOT PROCEED with the purchase unless you are comfortable with all the possibilities.
- Following advice on social media without fact-checking. I am in several note investment discussion groups on Facebook. And I’ll just say that, in my opinion, the groups are more entertainment than they are a go-to resource; although some are better than others. These groups are normally formed by an investor seeking to broaden their influence over a community of investors and create a market for their deals. However, the experience and knowledge of that investor, or of the group members, can vary. Oftentimes, the investors within the groups seek advice on issues concerning their own deals. And the members of the community share (or try to share) their best practices. Sometimes, the advice is spot on. At other times, their advice can be incorrect at best or downright illegal at worst. Unfortunately, the advice given is often not fact checked by someone well versed in state/local laws or federal regulations. That inquisitive investor not only may be making a poor decision in regards to his or her investment but also may be putting his or her money (and freedom) at risk. Like anywhere else on the Internet, folks need to be careful about whose words they should trust.
And that’s the way it is. This is my list of four dumb silly less-than-intelligent unnecessary things that note investors are doing nowadays that they should not be doing. Save yourself some time and money by doing the alternative. What else would you add to The List?