To run a successful notes business you need to become comfortable with negotiation. I find myself negotiating on a daily basis. Often its with borrowers on the terms a forbearance agreement, sometimes its with vendors, sometimes its with loan sellers, and occasionally with loan buyers. I would rate myself as an “ok” negotiator overall. I don’t think I’m great at it, but I’m definitely not afraid of it either.
When I was doing my MBA at University of Colorado I was able to take a semester long class on negotiation. We did a lot of exercises where we were given a scenario, and then negotiated against someone else in the class. All the pairs would get the same exercise, you would be person A or B, and then at the end we would compare how all of the different A and B players did. Sometimes we would do negotiations with 3 or 4 parties involved instead of 2. Those were really challenging. It was great to see how different people in the class behaved, and also at the end to get an idea of what was actually possible in each scenario and how you did compared to everyone else who played the same scenario.
More recently I’ve listened to Chris Voss’s Never Split The Difference on Audible a couple of times.
Chris Voss was a FBI hostage negotiator. This book was pretty mind blowing for me. Its really amazing what can be done even in situations where it seems like you have no leverage at all. For example Chris faced many situations where a terrorist or bank robber was threatening to kill a hostage and on the surface it appeared there wasn’t much he could do, but his team was able to get things resolved. This is a book I can’t recommend enough.
One of the things I like about the notes business is that you run into the same situations over and over, so you have the opportunity to adjust and improve over time. When I worked in aerospace it seemed like I would run into a lot of situations once, make some mistakes, then walk away with some good lessons learned, then never get an opportunity to apply those lessons. Not so in notes. One very common situation is negotiating with borrowers over forbearance agreements.
As lenders we enjoy significant rights, and it puts us in a very strong position. However, because I am buying these notes at a sizable discount and I’m not an actual bank with a lot of bureaucratic rules, I have wide flexibility to make deals with borrowers. The bottom line is that if the borrower has some reasonable income, wants to stay in the home, and is willing to pay, we will be able to reach a deal that keeps them in the home. The leverage I have is that if they don’t want to pay I can ultimately take the home back. But I’ve had a couple of cases recently where borrowers haven’t believed that I will follow through on this.
Many of the loans I buy have been passed around a couple of times before they get to me. I can’t be 100% sure of what is going on in a borrower’s mind, but I think that many borrowers believe that if they don’t make payments I won’t follow through on a foreclosure or forfeiture (in the case of a CFD) and just sell the loan off to someone else like others have done. Every note buyer has their own model and plan for each deal. For me personally, I try to buy loans that have had some recent payments or other signs that I might be able to get it reperforming. But I don’t buy any note that I’m not willing to take to foreclosure. When a loan finds its way to me its either going to reperform, or I’m going to take the home back and resell it. I’m not going to go through fits and starts with the borrower where they pay for a while and then stop. Its definitely not going to become a zombie loan where it goes for a long period of time without payments. A lot of people obviously don’t use this model, if they can’t get it to reperform they’ll sell it to someone else. The problem I have is some borrowers have been conditioned to believe that if they don’t pay the loan will be resold, but I haven’t been able to effectively communicate my intentions to borrowers until its too late. You would think that demand letters, door knocks, and calls from borrower outreach folks would do it but that’s not always the case.
I had a situation recently with a CFD where the borrowers had significant equity, and its would basically be crazy for them not to make the payments if they were able to because of the equity they would lose. They chose not to and lost the home. The borrower called me the day of the hearing after the judge canceled the land contract and gave them 7 days to leave the home they have been in for 8 years. I’m not sure what she expected, but I think she legitimately did not think that would happen. If she could travel back in time a few months she probably would have done things differently. We could have made a deal that resulted in a win-win, instead of the win-lose that we ended up in. It makes me wonder how many of these loans would reperform instead of go to foreclosure if the borrowers better understood what was going to happen?
I have a lot more to say on the subject of negotiation. I’m really only scratching the surface here. I’ll pick it up again in a future newsletter.