Not everything in life goes as planned. It’s a lesson we have all learned at some point — whether good or bad.
It also includes notes. You can do everything you can to set yourself up for success and manage your risks, but sometimes things – and payors – go awry.
When note payments stop coming in, it’s a stressful time. But it’s also time to slow down and think through the next steps. Find solutions and opportunities before finding the panic button.
Five Strategies for Non-Performing Notes
1) Get the Borrower on Track
Life happens! People have a medical emergency, a change in job status, a break-up — lots of things can cause temporary bumps in the road.
If your borrower has typically been on time with no issues, your first step should always be to reach out with an understanding hand. Open lines of communication with a solution mindset are what is needed. Instead of letting them fall behind or get overwhelmed, offer some solutions that work for everyone.
Can they pay half of the missed payments next month and the month after to catch up? Can they split it into thirds? Are there resources available for their situation (like unemployment funds, natural disaster relief, medical assistance, etc.) that you can help them access?
It’s also a good time to double check the status of real estate taxes, property insurance premiums, and HOA dues (if any). Oftentimes these will fall behind when monthly payments are missed.
Work closely with your loan servicing company to exhaust all options before the note becomes seriously delinquent. Throughout the process, stay mindful of the federal Fair Debt Collection Practices Act (FDCPA) and any state laws that may apply to communications with a delinquent borrower.
2) Loan Modification
If their life changes are not temporary, a loan modification may be the answer. It requires an in-depth and honest conversation with the borrower on what they can afford and manage with their new circumstances.
Modifications can include:
- Lowering the interest rate (and therefore the payment)
- Extending the term to reduce the monthly payment
- Adding missed payments to the end of the note
- Adding in monthly costs for taxes and insurance to help the borrower budget
A modified, performing loan is worth more than a non-performing loan at original terms. While it may extend the time it takes to get your full payout or potentially lower your yield, monthly payments might be better than other alternatives.
Make sure to work with your servicing and legal team to ensure your new terms follow state and federal guidelines and are properly documented.
3) Deed in Lieu of Foreclosure
Before jumping straight into foreclosure, consider a Deed in Lieu to save everyone headaches.
When a borrower has no feasible path to catch up or afford the property, they may be willing to relinquish ownership voluntarily. The property is deeded and transferred to the note holder as a form of debt forgiveness. It may be worth it for a bit of cash, which does hurt your wallet, but is often better than the cost and time of foreclosure.
This may not be a viable option if there are underlying mortgages, title issues, or junior liens that complicate things. Always order updated title and work with a qualified legal team in these situations.
4) Foreclosure
If the above strategies don’t work or you have an uncooperative borrower, foreclosure may be your last resort.
Just like a bank, you can take property back for non-payment.
While lengthy and costly, it does eventually get you back in complete control of the property and able to find solutions to recoup your investment (whether from the sale of the property or a new seller financed note).
As always — work with a qualified legal team that understands seller financing and your state’s foreclosure processes. This can not be emphasized enough: you will need them during the foreclosure process.
5) Sell Your Note
Another option? Don’t deal with it. Instead, sell your note.
While you will need to fully disclose the status of your note and the payment history, having missed or late payments does not rule out selling your note.
In fact, some note investors specialize in purchasing non-performing notes and working with borrowers to get back on track. And most offer free, no-obligation quotes so you can see your options before deciding on your next course of action.
When it comes to creating and investing in notes, you always have options.
Setting yourself up for success starts from the beginning. Learn more about Creating Notes and Due Diligence for purchasing notes before getting started!
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