Exit Strategies in Note Investing – Part 1

As a Note Investor, there are many exit strategies.  This article explains a few of the many exit strategies we have as note investors.  I am going to focus on strategies that aim to keep the borrower in their home which is a “Win-Win” for both parties.  Keeping the borrower in their home is our primary goal majority of the time.

Modify the Loan

The first exit strategy is to modify the loan. Basically we call this “rehabbing the borrower” versus rehabbing the property.  Sometimes this modification is simply a reduced interest rate.  For example, if the borrowers’ original rate was 10%, we could lower the rate to 8% thus saving them money while we still make money.

We could potentially reduce their payment as well without reducing the overall principle amount of the loan.  In order to determine what a borrower’s payment could be, you can determine the average rent in their area by using a tool such as rentometer and base their new payment off of the average rent for a market area.  You typically want to make their payment a little lower then the average rent to incentivize them to stay in their home.


Another option once the borrower has started making consistent payments for 6 months to a year is to forgive some of the past due payments or loan amount, remembering that we picked up the asset at a good price and will still make money even with forgiving some of the loan.  By forgiving some of the loan it may open the opportunity to the borrower to want to stay and refinance into another program such as the FHA 10-23 loan refinance program where the borrower can refinance up to 97.5% of the Fair Market Value (FMV) after making as few as 3 months of payments on time.  This can also be combined with Hardest Hit Funds which is available in many states across the United States.
When we modify the loan, we ask the borrower to bring some money to the table as a down payment or what we like to call “Skin in the game.”  We like to have the borrower bring several months of payments to the table so that they can show they are truly interested in modifying the loan and staying in their house.  Part of the down payment could also be spread out over time to help the borrower.

Reinstate the Loan

A second type of exit strategy that keeps the borrower in their home is basically reinstating the loan which simply means the borrower starts making payments against the existing loan amount, remembering that you are now the bank.  This type of strategy typically works best when rent is higher than their original mortgage payment.  One thing we can do with this type of strategy is to defer some of the back payments if the borrower is making consistent payments.  Again, you would want the borrower to provide some “Skin” to continue with this strategy.

Remember these are just 2 exit strategies that aim to keep the borrower in their home.   Future articles will  continue to explain additional Exit Strategies in detail for Note Investors.

By | 2017-04-23T11:02:59-04:00 November 1st, 2016|Exit Strategies|Comments Off on Exit Strategies in Note Investing – Part 1

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