Who works out your non-performing notes?

Question

I was wanting to know if most people use servicers to work out their non-performing notes and what kind of luck have you had going that route?  I have an asset manager working out some of the notes in my SDIRA but I was considering using a servicer to work out one of my loans.  Has anyone had good luck going this route?  This particular loan is in my SDIRA. It was also suggested to me that as long as my loans were boarded with a licensed servicer (they are boarded with FCI) that I could contact an attorney directly and have them push legal/send demand letters, initiate FC, even have them negotiate a workout on a non-performing 2nd that I own.  I am told that as long as I have no borrower contact at all, this is acceptable for a loan held in my SDIRA.  (This loan is in KS and my asset manager doesn't like to deal with KS notes.)

Bill McCafferty · Answer

These are my stats for 2nds.  I have worked out over 200 2nd mortgage deals in the last 4 years.

50% of my files are current on the 1st mortgage, the other 50% are delinquent or not knowing the status of the 1st mortgage (at least until we find out).

60% of my deals pay me in some way; a payment plan with arrears upfront or a discounted payoff.

The other 40% become; BKs, REOs, rentals, short sales and some don't work out.    To me this is where the strong survive.   The 60% are easy to work out, its the other 40% that you need to get good at.    Every deal is different.

I'm very aggressive with legal.   I press with legal until the borrowers pay me; hand me the keys or file BK.   It allows me to take all the emotion out of the deal.  I make them decide.

Patrick Desjardins · Answer

No matter the case, the first thing to do is always the same: you need someone to contact the borrower to learn what happened, what's going on now and what they want to do.

Let's say you reach out to them and they say "screw this, they can take the house I don't care" well then your options are going to be different than if they say "I'd rather sell then house than get a foreclosure on my record".

Until you know more, you just can't determine what the best course of action is.

As far as working out notes, there really are 3 options which all have pros and cons:

- Do it yourself or in-house: you need to be good at negotiating, know the laws and want to dedicate a lot of time to it. In my opinion this would be the best option by far if not for the lawsuit potential. When I started out I was doing my own collecting and the success rate was great since no one cares about it more than you do.

- Use a servicer that does collections: It's very hit and miss. The one you planned on using seems very good as the owner is an investor himself. Others can be absolutely terrible.

- Use no collection servicing and 3rd party collections: you can use an attorney firm that does collections or an asset manager while your loan is serviced by FCI.

To be honest, coordinating the foreclosure with an attorney isn't that complicated. You just send them documents and wait, and answer emails. The reason investors typically prefer dealing with the borrower themselves instead of going through the attorney is the $250/hour the attorney charges when the borrower calls with stupid questions. Attorneys also typically aren't trained to negotiate on your behalf - they're trained to foreclose.

Bob Malecki · Answer

Hi Sandy I have quite a few notes in my SDIRA and have them boarded with FCI for servicing and also have a freelance assistant who performs borrower contact for me/my SDIRA. I think as long as you are working with a licensed servicer you can contact & direct third party services directly like attorneys, property preservation companies, etc.

If you were to buy a flip home in your SDIRA, you can contact and deploy contractors, RE agents, insurance companies, etc., as long as you don't do any of the renovations yourself. Same difference when "renovating" a note.

Bob Malecki

Bob Malecki · Answer

Also, I suggest that you contact the lender in 1st position who is foreclosing and make sure that they have your/your servicers contact info for notifications.

Another option would be to buy out the first since there is equity, but that may not be feasible if you can't get the funding for it.

Also be aware that servicing fees and attorneys fees can eat up any profits you may see, especially if its in a judicial foreclosure state. For instance, a full collection plan at $95/month can get expensive if the FC takes a year or two to complete.

Originally posted by @Sandy Uhlmann :Not sure how to proceed now because I just found out (via netronline) that the first has initiated FC so I am not sure of how to proceed.  There should be equity in the property to cover my second but if it goes to sale and the legal fees get tacked on, who knows if I will get any "leftovers" or if there will be any at all.

Mark Gibbs · Answer

@Sandy Uhlmann I was curious because I have heard differing opinions on what constitutes an arm length transaction through the SDIRA. I guess it is the differing opinions about what is considered 'working on' a loan or property.

I suppose more distance is probably better so you don't break any rules. Again, how do you go  about identifying an asset manager.

Sandy Uhlmann · Answer

@Mark GibbsI have an asset manager for all of my notes that I hold in my self directed IRA except for one.  I have just been sitting on this loan up to this period of time and doing nothing.  It was suggested to be by Fuquan Bilal (National Note Group) that another alternative to an asset manager or having a servicer work out these notes would be to contact an attorney and push legal/FC.  He suggested that I could instruct the attorney that I did not want to have any direct contact with the borrower and that if the borrower wanted a workout they would need to go through them (the attorney) or contact the servicer it was boarded with.  I did check with my SDIRA company and they did confirm that as Iong as I did not have any contact with the borrowers this route is fine.  I am simply directing vendors.  I have not tried this route as of yet but It is an interesting alternative.

Not sure how to proceed now because I just found out (via netronline) that the first has initiated FC so I am not sure of how to proceed.  There should be equity in the property to cover my second but if it goes to sale and the legal fees get tacked on, who knows if I will get any "leftovers" or if there will be any at all.

Don DeMarco · Answer

Peter you are correct, I said 60% work out but that really includes Modification, forbearance, DIL and cash for keys.  The other 40% go to foreclosure

I guess I was being too general, I hope that clears that up

Mark Gibbs · Answer

@Sandyuhlmann, are you using the approach of a asset manager or attorney to keep this an arm lengths transaction due to IRA rules Or is this just a preferred approach? And where did you identify an asset manager to help work out loans?

Peter Lange · Answer

@Don DeMarco - I'm just getting into notes and have a few questions about your post. Is 60% workout considered high, average or low in the industry? Eddie Speed says average is 40% workout, 40% DIL, and 20% foreclose. So, I'm guessing your figure is high. I looked at your website and see that you are focused on firsts. So, I'm assuming your figure is for firsts and so is Eddie's. Any idea what the workouts stats are for seconds? What is happening with your other 40%? Thanks.

Don DeMarco · Answer

Sandy

I personally do all my workouts myself, have had success at 60% of notes purchased, however if you are not comfortable speaking with the homeowners then by all means have your servicer do it.

Who works out your non-performing notes?

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