Orange County FIBI Investment Club Live Presentation of Exit Strategies For Non Performing Notes
On December 7, 2021, I made a presentation of 5 Exit Strategies for Non Performing
Notes by Zoom in front of the Orange County FIBI investment club. I shared the general
strategies, “how to” and specifics, and real-life examples for each.
My last presentation for the group in July, 2020 focused on sourcing non performing
notes from hedge funds or other large note funds. This presentation focused on what do
after note buying.
The presentation runs about an hour and a half and is packed with useful information,
especially if you’re note investing for yourself. If you’re more interested in passive
investing, it’s informative to see how a note funds like us carry out our business.
Here are the highlights from the presentation:
End Goals Determine which Strategies You Use
Are you a buy and hold investor? Are you looking for large chunks of money? Passive
By identifying your business strategy, you can focus on the exit strategies that will get
you the best results.
1. Sell Property at Foreclosure Sale
When most people think about foreclosure, they think about the property auction that
happens at the courthouse steps. This strategy occurs when a third-party bidder wins
the auction and purchases the property.
Once the sale is completed, you are sent the net proceeds of the sale of the property,
the debt and loan are extinguished, and you have “exited” with nothing more to do with
In the presentation, I go into the details of how to get the foreclosure started, the
different considerations, how to set up your opening bid, and more.
2. Sell Property After Sale as REO
REO means “Real Estate Owned” and is a common term used in the banking industry
for properties that revert to the lender via foreclosure sale. When the lender is the
highest bidder at the auction, then the lender wins the sale. The debt is extinguished
and the lender’s recourse is to collect on the debt through its ownership in the property.
I discuss the details of the process and explain that once you take title to the property,
this strategy becomes the same as that of any other traditional “fix and flip” real estate
3. Deed in Lieu of Foreclosure
Sometimes a borrower of one of your non performing notes will genuinely try to work
with you to resolve their default. One of the available options is the deed in lieu of
The borrower agrees to vacate the property, 30-45 days after you reach an agreement,
and to leave it in broom swept condition in exchange for a cash payment and release of
obligation from the mortgage debt. It’s a win win situation as the borrower gets to move
on with their life and the lender gets the property without a fight.
I go into the details of what types of documents you need, how to conduct the
transaction, and considerations for setting terms. Most importantly, do a thorough title
check because liens have to be dealt with prior to concluding the transaction.
4. Short Sale/Short Payoff
This is another strategy that you use with a cooperative borrower. A short payoff is a
situation where you accept less than the total amount that’s due on the loan. This is
possible for the note investor that buys the loan at a discount because what the
borrower owes on the loan is independent of what you paid for the loan.
A short sale is when the sale of the property is required for the short payoff scenario to
work i.e. when the borrower doesn’t have the cash or ability to refinance to payoff the
5. Re-sell the Loan
Non performing notes are assets like anything else. Banks and note funds buy and sell
loans all the time. Each is looking for something different just like real estate investors
look for different things when they buy and sell real estate.
When a note investor adds value to a note by advancing it toward foreclosure or by
getting the borrower to start paying on the loan again, they’ve increased the value of the
note and can sell it for more than they bought it for.
If the note buyer gets a significant discount on a non performing note because they
were able to get a great deal, he or she can simply flip the note to private funds or note
funds and realize a profit without taking on additional risk.
6. Bonus Strategy: Loan Modification
We don’t normally use this strategy because it doesn’t fit our business model. However,
for those that have more of a buy & hold mentality or like to get loans re-performing, you
can increase the value of the note through loan modification.
Loan modification helps by getting borrowers to re-perform on their loans. You can
change the terms of the loan to make it easier for the borrower to perform while at the
same time increasing the value of the note so that you can re-sell it as discussed in
If you have the time and motivation, check out the entire presentation. It’s loaded with
nuggets of information that you can use for own note buying business. It’s also a great
resource if you’re new to note investing and want to learn more.