When our clients purchase a distressed mortgage note, they generally have an idea of what they plan to do with the note. However, like with any plan, sometimes things do not pan out as expected. You may not be able to get ahold of the homeowner, you may not be able to come to a financial agreement or you may want to foreclose but after hearing the story of the family you decide to work with them to keep them in their home because you choose the ethical investing route. If you purchase a distressed mortgage note that does not align with your original game plan, there are multiple exit strategies available to keep the ball rolling. After all, you are now the bank and the ball is in your court.
One key benefit when investing in the note industry is you are not “married” to any note. If it is not working you have options…
Keep Circulating Your Investments
If you purchase a portfolio of loans, you might have (for example), 8 non-performing and 8 re-performing loans. Your original plan was to renegotiate the terms with the homeowner, however, you could not come to an agreement with 4 of those loans to start paying again. Now that you have 4 loans that do not align with your initial investment strategy, did you know you actually have the option to put those loans back on the market? You can either sell the loans privately or find a broker to sell the deals for you. When purchasing one of our bank direct assets, it is not uncommon to receive 20-40% ROI. Meaning, you are still potentially able to turn a profit. Whichever you choose, if you play the game right you can grow capital while circulating your investments.
Utilize a Creative Exit Strategy Approach
Before deciding to continue circulating your investments by selling off your loan, you can also choose to take an alternative or unconventional approach.
If you keep up with our educational blog posts, we tend to compare the traditional real estate industry vs. the distressed real estate industry. Typically, a traditional single-family home real estate investor has two main exit strategies. You are either going to decide 1) Am I going to put money into this property and dump a bunch of money with my contractors/construction crew, then renovate this as low as possible so I can eventually re-flip it and turn a little profit, then rinse and repeat and do this over and over again -or- 2) Am I going to clean this property up a little bit and create a rental play as a landlord.
By putting a new spin on the way you invest, you are talking about buying distressed notes (the mortgage debt). Generally, you have about 5 or 6 exit strategies to start with, then there could potentially be more depending on if you are a short-term investor looking for capital growth, or are you a long-term investor looking for consistent passive income.
What creative exit strategies are available to you?
- You can try to avoid foreclosure altogether
- You can convince the homeowner that foreclosure will affect their credit for the next 7 years, and to avoid it you will rid the debt entirely if they sign the deed over to you. You could even offer the homeowner a first and last months rent at a new place, this is called a deed-in-lieu or cash for keys
- You can convince the homeowner that we can do a short sale on the home and approve it within 48 hours
- You can give the homeowner a modification that allows them to stay in the home and continue to pay
- You can work a deal with the homeowners friends/family members to purchase the home at a reduced payoff, and the homeowner will make subsequent payments to the friend/family member which they will then be off the hook with you
- You can work with the homeowner if they went ahead and filed bankruptcy
The Ball is in Your Court When You are the Bank
When you purchase these bank direct assets, you can make these kinds of decisions. The ball is in your court when you are the bank. Furthermore, these are the same offerings that the bank can offer its customers but because they have not set up an infrastructure to carry out loss mitigation and debt collection loans that they originated, it is not in their business model to offer creative financing. The quarterback doesn’t run down the field and catch it. The functionalities are separate. At this point, a firm like Revolve Capital would come in and alleviate the bank’s issue by not being able to collect on a debt that is not paying them. We offer the bank a bump above 0, which clearly is an incentive for them to sell it.
There are a handful of different ways that we can look at buying a mortgage for a steep discount. Depending on which route we want to take, all of those routes mentioned to you are profitable and if you bought that loan for $50K, but it is worth $100K, all of the routes we just walked through would sell that deal for much higher than the $50K price you bought it for.
When you are “the bank”, the sky is the limit because you do not have traditional or expected rules to follow, you can utilize a creative exit strategies… and if you decide the deal you purchased from us is not panning out how you expected there is the option to sell the whole loan (private party or with the use of a broker) and keep circulating your investments, then move on to the next portfolio of assets.
Keep the ball rolling by expanding your note investments. If you’re interested in expanding your note portfolio and utilizing creative exit strategies, get started now by clicking here.