Problems equal Profit - Posted by John Behle
Posted by John Behle on November 24, 1998 at 19:44:42:
It’s good to have a little fear of foreclosure. Direct the fear towards the “due diligence” on the note. Make sure it is a good deal and answer the all important question.
“Would I buy this property under the same terms?”
Include in those terms potential costs of foreclosure such as attorney’s fees, back payments, etc. If you wouldn’t be thrilled to own the property - don’t buy the note. In that way it is no different than buying real estate. Look at it through those eyes.
One thing I always look for is a point where I start trying to “Justify” the note purchase. I operate by the motto “Hesitation is a “no” vote”.
If I’m not afraid to get the property back, it helps any later negotiating and also, leads to a more motivated payor. The more they have to lose, the more anxious they are to avoid foreclosure. This the reason lenders insist on seeing a cash down payment on a mortgage loan. They know when a payor has hard earned cash at risk they are less likely to default.
So, a large piece of the foreclosure story takes place before even buying the note. Next is collections. Every interaction with the payor makes a statement that you WILL be paid. There is no question about it.
I operate by the axiom “Firm, Fast, Furious and Flexible”. I take every legal step immediately and let them know it. If they are late, they pay a late fee, etc. At the same time, I am creative and flexible if there is a problem.
A fairly low percentage of notes go into foreclosure. VERY FEW will actually have to go the full distance. Occasionally you run across a pathological liar or someone totally un-reasonable, but not that often.
If someone falls behind in payments, I take them to breakfast and find out the problem. If I bought the note right, I have maneuvering room. I can do a variety of techniques. In your tapes there is a section on collections, getting paid and avoiding foreclosure. The techniques are discussed there, but let me give you the most common here.
Most payors that fall behind CAN’T CATCH UP, but CAN KEEP UP. Meaning they can’t catch up the back payments, but they could continue making payments. Many times there problem was a temporary one, like out of a job for a few months.
Rarely will a lender help them in any way. Most will not even consider forgoing the back payments or “arrearage”. They create their own foreclosures by being inflexible, short sighted and stubborn. I look at it as an opportunity to help someone, yet not at the sacrifice of my or an investors safety or profit.
I use it as an opportunity to improve the note. With my financing resources, I may be able to get them a new loan and even do a debt consolidation to change their circumstances around. I will even go one step farther with debt counseling and even a self development course to help them understand and get control of their debt habits. I know money is solely a reflection of inner beliefs.
I may also restructure the note similar to the following. Let’s say they are $1500 behind in payments on a $30,000 note. The balance would be $30,000 at 8% for 300 months - if they were current.
The payment is $231.54 per month. If I purchased the note at a 14% yield (assuming it was a good note at the time), my price would have been $19235.12 (Let’s call it $19,200.
The payor can’t catch up, but can keep up. I offer them the option to add the $1500 back on to the note if they will raise their payments to $300 per month. Here’s how the note would look.
$31,500 @ 8% $300 per month for 181.20 months. Not only do they get out of foreclosure, but their home is paid off 10 years earlier. My yield would now have increased to 17.36% and I helped someone out of a problem - ONCE. I let them know very clearly that this is one time thing. If I perceive they have a chronic problem, I will tack an extra $1400 on to the note and run them through a three level self development training and an “Abundance and Prosperity” course to get their act together - and get off the poverty game.
If their cash flow is such that the slight increase in payments is a problem, then I may keep the payment the same or actually lower it. I can then have the payment graduate each year.
Here’s a calculator quiz. Lower the payment to $200 per month, tack the $1500 on to the note and graduate the payment $25 each year. So, year one the payments are $200, year two $225, year three $250.
How long until the note is paid in full? What is my yield? Post your answer if you want to play and I’ll calculate it too.
That’s the long answer. The short one is that not that many notes go into default if you do your homework in buying and collecting correctly. Those that do go into default end up being a profit as you restructure or take back the property. It’s a rare note that you will have to push all the way through foreclosure - IF you do your job right.