In an earlier article, we reviewed two exit strategies (modifying the loan and reinstating the loan) for note investors that aim to keep the borrower in their home. If you missed that article, you can look it up on our blog. This article will explain additional exit strategies we have as note investors.
The first exit strategy is a loan assumption. Basically this is where you swap one borrower for another. So for example you have a divorce situation where one spouse doesn’t want the home, but the other spouse wants to stay in the home. In this situation we would let one borrower go and leave the second person on the loan. We would have the second person complete a loan application to make sure they can afford the home.
Another strategy is a Short Sale. Remember when we buy the note, we become the bank, so we can set the “short” amount that we will accept for the property. Once contact has been made to the borrower and it becomes known that they do not want to stay in the home, we could list the property as a Short Sale. We would allow the house to be sold below the unpaid balance (UPB), which is still above what you paid for the note. You want to make sure you hire a realtor to list the property. Typically, we could list the property around 85% of Fair Market Value (FMV). By listing the property below Fair Market Value, you could potentially sell the property much quicker. Also, with you being the bank, the process could be completed faster than the traditional real estate short sale.
Deed in Lieu/Cash for Keys
The next strategy is Deed in Lieu or Cash for Keys. If you use this strategy, you want to make sure there are no junior liens on the property or you have a strategy to mitigate the second lien. With this strategy, the borrower gives the home back to the bank. Sometimes, we (the bank) may offer cash for keys to entice the borrower to give the home back in good condition and vacate the property. Once the house is returned, the debt is forgiven and it becomes a Real Estate Owned (REO) property. At this point, the bank (investor) can sell, rent, or do an owner finance deal for the property.
A strategy that can happen occasionally is a cash payoff. With this strategy, the borrower pays off the loan and remains in the home. You could offer a structured pay off say over three months or offer a lump sum payoff.
Resell the Note
Another strategy is to Resell the Note. These notes could be non-performing, semi-performing, or even performing. Remember you picked up the note at a discount, so you could resell the note and still make a profit. You can add value to the note by starting the servicing, working out payment plans with the borrower, or even starting foreclosure if necessary.
Foreclose on the Note
The last strategy is to foreclose on the note. As a note investor, this is typically our last resort strategy. Once you purchase a non-performing note, you want to make sure you start the foreclosure process within 30 days because it puts pressure on the homeowner to do something. You don’t have to continue, but by starting the foreclosure process, the borrower knows you are serious about getting a resolution. The length of time it takes to foreclose depends on the state where the property is located. Judicial states typically take longer than non-judicial states. Foreclosures average 9-18 months, but can be as short as 21 days or as long as 36 months or more. One issue that you may run into is if the home is occupied, the borrower may not want to leave the property once its foreclosed.
If you have an IRA that isn’t performing to your needs or expectations or a retirement account with a former employer, we would love to show you how we can work together to increase your returns exponentially. If you would like to learn more about making your IRA work for you to earn potentially double digit returns, I encourage you to touch base with us.