This is part 3 of a 3 part series on loan mods for investors. If you're considering a loan mod, please make sure you read the first two parts of the series as well.
New day, new deal…
I met with a mortgage broker last week, and she told me a surprising story. She has five properties, including a triplex in Beverly Hills and a 24 unit C-class building in Atlanta. She just finished doing loan modifications… on all of her properties! Her best loan mod? Took her down from 8% to a 3% 5-year fixed ARM – at the end of the five years, the rate can increase 1% a year, with a lifetime cap of 6%. They also extended the loan to a 40-year note. All this added up to (wait for it) a $2K monthly reduction in her payments. Sounds good, right? But the kicker is that at first, all the banks refused to work with her.
So how did she get her loan mods? She let each of the properties fall 60 days behind. Yes, that's right. She missed two payments, and suddenly all the banks were willing to work with her. This doesn't seem logical,and it contradicts what I said in earlier posts on the same topic, but it was recently explained to me from the banks' point of view. You're a fireman, and you have a guy calling to you down the block, “Hey, this dry brush needs cutting.” No problem, except you've got four people standing in front of you who are on fire. Which would you deal with first?
Well, the banks have a quota every month. So they are happy to help you if you are current on all your loans, but they can only get to you if they have the room. Of course, once they've turned down your loan mod you can't go back again unless you can show new hardships. So keep all this in mind if you're planning to request modifications of loans which are not behind.
Also make sure that you have a hardship you can show, as loan mods are hardship programs. No, being upside down isn't considered a hardship, at least not by itself. But if you're an investor in today's market, you probably have had a big drop in income, and can show cash losses, job loss or reduction – heck, even a broken marriage – all of which are considered legitimate hardships and will help the bank say yes to your loan mod.
Business Opportunity or Scam?
A cottage industry growing as fast as this one is fraught with rip-offs. I have heard that many loan mod businesses will be shut down over the next six months as the business becomes regulated by the states or further by the Federal government. Be careful who you do your mod(s) through. Make sure an attorney handles it, because they have more accountability than a non-attorney operation (in some states unless you're dong it yourself, this is the only way you can do a loan mod). Put your mod on a credit card, so that if something goes wrong, even with a money-back guarantee, you can dispute the charge.
Once you find a good company, if you're looking for a new revenue stream, you may also consider joining them as a rep. Make sure they're in compliance with state laws and they take the money themselves. While I've seen loan mods that cost as much as $5000, I suggest you keep in mind how much the attorney is charging and how much you can upcharge so that you make a profit for your time and effort, but that it is still fair to the client.
A good rule of thumb is that if it takes more than 6 months with the modified loan to break even on the cost of the loan mod, it's too expensive. Use this rule for yourself, too, when you are setting up your own mod. To give a simple example, if you have a loan of $3000 a month and your new modified loan will be $2500, you are saving $500 a month, so your loan mod should cost no more than $3000. Of course it's up to you as to how comfortable you are with the numbers.
While the attorneys handle most of this work and will do all of the actual negotiations on behalf of you or your clients, these guidelines will help you look out for your own interests as well as those you are trying to help. Know this: if you can show hardship, a loan mod is a terrific way of saving (often tons of) money on your most important and largest monthly expense, every month as long as you own the property.