The chief concern for lenders servicing an existing loan is to create a positive experience for the borrower. That begins at the application process, but it doesn’t end with the funding of the loan. In fact, the borrower experience doesn’t end until the loan is paid in full.
The first thing to consider is the exit. As the lender, your focus should be on helping the borrower exit the loan successfully. That requires, to some extent, putting yourself in the borrower’s shoes. With fix-and-flip loans, there are two primary ways borrowers make the exit. One way is to sell the property and the other way is to refinance the loan.
In the first instance, the investor has made the necessary repairs and put the house on the market. In that case, they line up a buyer, sell the house, and pay off the loan.
In the case of refinancing, many times, the borrower has missed a payment for some reason. More often than not, it isn’t their fault. Either they’ve had a subcontractor miss a deadline, they’ve got an issue with materials and supplies, or some other unforeseen situation has delayed them. Maybe there was a delayed shipment or weather destroyed critical construction materials. In cases like these, it’s important not to come off like a payment collector.
If you’re a borrower and you’re trying to get your crew back to work again, acquire your materials on time, and get your project back on track, you don’t have time to talk to bill collectors. But if someone is calling to help you with solving your problems, you’re more likely to take that call. And you’ll be more cooperative.
The goal is not to get the borrower to make an interest payment on the loan. It’s to get them out of the loan so they can get into the next one.
Hurdles Real Estate Fix-and-Flippers Must Jump Through
Property rehabilitation isn’t easy. The fix-and-flipper has a dozen or more concerns going through their head all the time.
Property acquisition is the first step. Investors must ensure they buy the right property at the right price. While doing that, they must assess the repairs necessary to get the house back on the market and estimate what those will be. Then they have to manage the construction project. If they do their own repairs, they have to buy materials and make sure they’re delivered on time. They may even hire a crew to help. Some investors hire a construction crew and serve as their own general contractor. The driving motivation is getting the property back to market as soon as possible.
Throughout the process, a variety of different scenarios could interrupt the workflow. A pandemic, for instance, might shut down construction for several weeks or months. In order to start construction, investors must secure permits and licenses. Those cost money, but if government offices are shut down, the process grinds to a halt.
Delays could happen for other reasons. General contractors can bail on a project. Or the construction crew can quit.
When a project veers from the straight and narrow, it isn’t just the borrower’s problem. It’s also the lender’s problem. And the lender who approaches the situation as a helping hand, to assist in solving the problem for the borrower, is a wise lender. Sometimes, a little creativity is required to help the borrower overcome their hurdles and get back on the right track.
How To Be a Problem-Solving Lender and Not a Payment Collector
If a borrower falls behind on a payment, it’s important to reach out to that borrower quickly. We don’t wait two or three months and watch the loan go into default. We contact the borrower right away to understand what obstacles they are facing. The better we can understand their situation, the more we can help them.
Most borrowers never miss a payment. In that case, we wait until month 10 on a 12-month loan term to contact that borrower. The goal is to prepare them for the exit.
The first question we ask is, “What’s your exit strategy?” If they want to sell the property, we get into a series of questions about their vision for that process. We want to know if it’s listed, are they using an agent, and how much they’re listing it for. We also want to know if they have it under contract. If so, we want to know the closing date.
We ask these questions to get a handle on where the borrower is in the selling process.
Of course, we hope everything is smooth sailing for the investor, but we sometimes find that it isn’t. The borrower may be behind on the construction timeline due to unforeseen circumstances. In that case, we offer solutions. One of the potential solutions is refinancing the construction loan. We can introduce the borrower to our network of lenders ready to refinance fix-and-flip loans. We also know brokers who can find a lender suitable for the project. And we have a list of other investors who can buy a property mid-construction.
AlphaFlow has found that about 20 percent of borrowers will encounter delays that could potentially lead to missed loan payments. Because we approach borrowers as an interested party ready to assist solving their problems, we see the majority of these distressed borrowers exit their loans successfully and survive to take on another project—and another loan.
Every Borrower and Every Project is a Unique Situation
Borrowers sometimes need other assistance.
For instance, when it comes to listing properties, borrowers may find themselves without the necessary resources to list at the right price. If they are independent investors or don’t have access to a real estate agent, they can’t access MLS data. We can educate them on how long properties typically stay on the market in their local area and help them navigate the market by reducing their holding costs and selling at the right price.
In New Jersey, for instance, there are zip codes where the average number of days a house is on the market is over 100 days. Some house flippers think they can take on a project, get it rehabbed in 11 months and sell it in 30 days. That rarely happens.
With accurate forecasting, we steer investors toward faster selling times, better market prices, and higher margins. And we do this, unlike a real estate agent, without taking a commission on the back end.
If a borrower requests to refinance, we go to the original lender first. If that lender isn’t interested, we can direct the borrower to another lender that is a better fit. Our goal is to be a resource for the borrower to ensure a successful exit on their loan.
When the borrower exits the loan successfully, the lender wins too.
About the Author:
Chase Scott is the VP of Operations at AlphaFlow, where he is responsible for all loan servicing and asset management operations at AlphaFlow. As a 10-year mortgage servicing and asset management veteran, Chase specializes in establishing operations and building high-performing teams. Prior to joining AlphaFlow, Chase was at LendingHome, where he built and led a full, in-house Servicing and Asset Management team — which included Customer Care, Loan Administration, Default Prevention, Loss Mitigation, Foreclosure, REO, and Portfolio/Investor Management functions. There, his team managed just over $1B in assets. He also has held leadership roles at Nationstar Mortgage and Conventus. Chase graduated from Texas State University.
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