You sold a property in Texas and you decided to offer owner financing. Now you want to know what to do when a borrower stops paying. In this post, we will talk about some of the options you have when this takes place.
There are going to be 2 sides to this coin. On one side the borrower has fallen on hard times and could be struggling to get back on their feet. On the other side, if this income is a part of your mainstream of income the domino effect means you could be facing issues yourself.
Fortunately, because you decided to owner-finance the property in Texas you have options. Additionally, If it comes to foreclosure Texas is a Non-judicial state. In another post, I will cover the differences between the two but for now, you need to know it puts the courts in your favor.
My suggestion to you will always be can you work it out before you take the home from someone.
Note: None of this is legal real estate advice please seek a licensed attorney if you need legal help.
Let us discuss a few of your common options of what to do when a borrower stops paying in Texas.
Modification
The first is going to be Modification. Modification is the process by which the terms of the loan are modified. This comes in many different shapes and sizes. We will not say exactly how you can modify the loan doing that would take longer than this page could hold. What I will say about modification is you need to determine what is the situation with the borrower.
Is this a seasonal issue? Did they get hurt at work? Are they now responsible for another person increasing their living expense?
Finding out what their situation is can put you in a position to figure out how to modify the loan.
Ex. You have a borrower which has now taken in a family members child. Which happens all the time for various reasons. This now means that there are more mouths to feed and the cost of groceries has just gone up. You learned from your servicer or from speaking with the borrower that if the payment was $100 less they would be fine. You go back and think $100 is what I need to change to get them back performing.
In this scenario, a simple modification extending the loan from 15 years to 20 years will lower their payment by over $100. You modify the loan and now have a paying loan again.
In the example above you can see what it took to get this loan back performing. Before we move on to the next option I want to say that Modification is a great tool for getting a loan back performing however only modify a loan ONE TIME. If they are going to need another modification or you continue to modify the loan this will significantly hurt the quality and value of the loan if you ever want to sell the note. Modifying the loan multiple times also hurts the borrower’s financial situation in the long term.
Cash for Keys
The next option you have when a borrower stops paying in Texas is going to be Cash for keys. Cash for keys is a simple concept that if you are also a landlord you probably have used to save on evictions. This is when you offer the borrower money in exchange for them leaving the property. This can be a quick and often fair solution for all. As the lender this means you save on foreclosure costs and streamline your path back to cashflow with this property. For the borrower, because they left with minimal questions asked a foreclosure does not end up on their record costing them the chance of future homeownership or issues renting later on.
In this option you will be owning the property again and depending on the condition of the property you can either rent it out, sell it as is, or sell it again using owner finance.
Foreclosure
A third option that you have is Foreclosure. Many lenders believe that this is the only option they have. As you have seen in this post you have more options than you think as the lender. Foreclosure is when a lender “attempts to recover the balance of a loan from a borrower who has stopped making payments to the lender by forcing the sale of the asset used as the collateral for the loan” (Wikipedia). Depending on the state you are in this process can take anywhere from a couple of months to over a year. In Texas, the foreclosure process is quicker than in others.
As investors and owners of debt we never really want to foreclose because then we have to take on the task of what to do with the asset again. Owning the real estate note means that you don’t have to deal with the property just the debt.
We have heard MANY stories of borrowers destroying the house before they leave. Creating costly repairs that in some cases render the home unliveable. This being said this is usually the last resort.
Once you own the property the same rules apply, you can now rent it out, sell it as is, or owner finance it again.
Sell the Note
The last option we will talk about many don’t know is that you can sell the note. If you don’t want to take on any of the above you need to know that you have options. I talk about this in all of the content I put together you have options. We work with many buyers ourselves included that will purchase these non-performing loans. Selling a non-performing loan means that you don’t have to worry about what you are going to now do with the property.
Whenever you sell a note the process is usually pretty quick and can be closed oftentimes in as little as 14 days.
If you have questions about what you should do with your note contact us we would be happy to help. We can get you pointed in the right direction, you can contact us using this link. Contact us
Thank you for reading and have a blessed day!
Sincerely, the Kodiak Bear Group
Do you want to learn more about where the value of your note comes from check out our page. Sell a note
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