Let’s face it, no one buys a real estate mortgage or creates an owner financed note in hopes that the payments stop coming in.
Although not the norm, payers do default on notes, stop paying, get behind on payments, or outright walk away from the property.
It goes without saying that you should always comply with all debt collection laws when dealing with a borrower/payer that gets behind on payments. That said, you do have options. Your success in getting the payer back on track (or getting your money back out of the deal) can be optimized by paying attention to a few important items.
1) Stay In Touch
Life happens. Sometimes the payer has every intention of paying, but due to unforeseen circumstances, is unable to stay on track. When this first happens, it is important you keep in constant communication with the payer.
Some people try and play ‘hard ball’ with the payer. The challenge with this tactic is it doesn’t really help the situation; it just puts the payer in an adversarial mode. And someone in an adversarial mode is not likely to answer or return your calls.
Tell the payer you understand that life happens and that you will do what you can to work with them and help them get back on track. Certainly remind them about any late fees or penalties, but again, you are here to help them.
There is no point in going full rogue out of the gate. Oftentimes payers are able to fix the situation within a few months.
2) Sell The Note
No one will judge you if you really don’t even want to deal with the problem.
You probably are not in the business of holding notes and most certainly not in the business of collecting past-due or delinquent notes. Oftentimes, people sell their notes to avoid these types of hassles.
You will need to fully disclose the current situation to the investor (missing payments, late fees, etc.) but it does not mean that you can’t sell your note. There are people that specialize in buying delinquent notes.
There is usually no charge to find out the value of your note… and you are not in any way obligated to sell. Once you have an offer, you can decide if it is worth selling the note or not.
3) Consider Accepting a Deed In Lieu of Foreclosure
This often-overlooked strategy is a great way to help you minimize the ongoing loss of revenue.
In this case, your intent is to take back the property and sell it again.
You can go through the long foreclosure process of getting the current payers (well, non-payers) out of the property, but this has an expense and takes some time.
Optionally, you can offer the payer a ‘Deed in Lieu of Foreclosure.’
The buyers actually deed the property back to you…saving you the time (and expense) of a foreclosure process.
Important Note: Be sure to check title is clear and work with a qualified attorney before accepting a deed in lieu.
4) Rework The Note
Maybe the payers are just too far behind or, if you were paying attention to #1, you kept the lines of communication open. In either case, you, as the note holder always have the ability to ‘re-work’ the note by creating a new repayment plan that works going forward for both parties.
For example, it is not uncommon to simply ‘start over.’ Well, not actually totally over, but start fresh by taking the delinquent payments and adding them to the back end of the note.
Typically you want some sort of ‘proof’ the payer is back on track before you forgive any debt or add payments to the back end.
Reworking the note can be as creative as you need. You can lower the payments, lower the interest rate, extend the term, or even give them a small credit for improvements.
Just be sure it is all documented and handled by an attorney to protect your lien priority.
Getting a Delinquent Note Back on Track
Understanding, tolerance, and open lines of communication just might turn a bad situation into a great paying note.