A short while ago an investor (Jim) came to my seminar with a particularly interesting problem. He was facing foreclosure and eviction of an old couple. Their son had borrowed money from jim and used their property as collateral by creating a second trust deed. The son lost his job and couldn't pay. Jim wasn't sure how to handle it and wasn't excited about the prospect of foreclosure and throwing the old couple out. The most viable plan he could see at that time seemed to be to try and sell the note to someone else (someone with an indent in their chest where a heart should be).
Most wouldn't see any other options. I asked a few questions and this is what I found out. The second that Jim held was about $15,000 and there was a first loan of $8,000. He is behind in payments by about $2000. The property is worth about $95,000 and the owner of the property wants to retire and move in a few years. His credit is good, but his borrowing capacity might be limited by his income and self-employed status. Jim's borrowing capacity is good.
See Any Options?
I suggested that Jim work out a deal to buy the property now at fair market value with easy terms. The down payment is the note that is owed to Jim and the balance of the seller's equity is taken back in a note with easy terms. This note is secured by Jim's personal residence (he had wanted to take some cash out to invest in notes). Jim then structures a lease for a fair market rent that runs for the period during which the current owner had planned to stay. Jim then refinances the property and has his cash back and cash left over to invest in discounted mortgages and receive a tremendous cash flow. Jim called the owner that night and reported back the next day that this option might be perfect. On each side of the transaction, each party wins.
- Jim doesn't have to foreclose
- He gets title to the property immediately
- He shifts equity from his residence to this other property that he is going to finance
- After financing the property, he has cash to invest
- The rental payment covers the payment on the note to the Seller that is secured by Jim's residence
- Income from the money invested more than covers the payments on the new loan on the property
- He has increased his net worth
- He has increased his cash flow and solved a problem
- He now has a portfolio of paper to improve or trade.
Property Owner's Benefits:
- He isn't foreclosed on or has his credit damaged
- He gets a sale for his property
- His cash flow improves because of the sale of the property
- He gets to keep the property until he is ready to leave
- He doesn't have to worry about selling the property
- No selling costs on his property
- Salvages the relationship with his son
This is an example of what creativity and a win-win philosophy can accomplish when it comes to collections. There should never be a need for you to foreclose on a property. This is just one of dozens of ways to remedy a bad situation and make a profit by doing so. I look upon someone falling behind in payments as an opportunity to profit while helping someone out at the same time.
If someone falls behind in their payments to you, there are options other than just foreclosure. Here are some steps to consider. They are divided into two categories but should be followed concurrently. Both creative problem solving and prompt legal action need to be followed.
Creative Problem Solving
1. Assess the potential of the transaction. Look at the note, underlying loans, value of the property and inherent potential for different alternatives. For example, if there is equity, you might try “Equity Arbitrage”. If there is any private financing, consider “The Discount Refinance”. If there is institutional financing that is behind in payments, a “Discount Substitution” may be a good possibility. Checking the title may tell you some of this information quickly.
2. Talk with the payor. Now that you have some idea of the possibilities, meet with the payor. I invite them to breakfast or lunch and talk over the situation. I find out the answer to the following questions. Why are they behind in payments? What are their plans at this point? What do they want to do? Would they want to keep the property (if possible) or sell? Could they continue making payments? What about the back payments? Could they handle a higher payment? Do they need a lower payment?
3. Total assessment of the situation. Now that you know a little about both the property and the payor, you are prepared to examine the different options. This is a time for brainstorming, put down every option that comes to mind and don't worry about what will work or which is best at this time. Be open to all ideas.
4. Determine the best possible solution. Now you decide which options to pursue. Pick the most likely ones and analyze them.
5. Prepare and present solution. Take the best solution and write it up and illustrate it in a manner that you can then take it to the payor and present it to him. Focus on the benefits to him and why it is a win-win solution. If after presentation, you learn something that makes the solution unfeasible or if it is unacceptable to the payor for some reason, then go back to step 4 and choose the second best solution.
Prompt Legal Action
1. Know your legal rights. First off, if you didn't know your rights up until this time, shame on you. Learn what you need to do. What notices to send, when and how to send them, and how to proceed. Make sure you seek proper legal advice.
2. Establish a paper trail. In addition to the required notices, send plenty of correspondence to document what is happening. Each letter reminds them and increases your chances of getting some prompt action.
3. Take legal steps. By all means take your legal steps immediately. Don't ever let “the check is in the mail” type excuses encourage you to discontinue or stall any legal actions.
4. Use third party intimidation. Let them know your company is putting the pressure on them, not you. A couple good third party techniques are to mail a letter on an attorney's stationary or at least put “c.c. Vic Vicious – attorney at law” at the bottom of the letter – indicating that you sent a copy of the letter to your attorney. Even the use of Private Detective Agencies has had some good success. Printing the big bold letters across a letter “FORECLOSURE NOTICE” makes it look like it is the actual legal notice.
5. Be prompt and follow through. Call or write immediately, don't let anything delay you, even your process of negotiation.
The legal steps are hopefully just a precaution. It should be rare that you will find any situation where a creative solution isn't possible – unless it never was a good note to begin with.