When you have been doing something as long as I have, you sometimes think that everyone knows what you know about a particular subject. I have been dealing with real estate lending and collections for nearly 30 years. I speak at national conferences on the subject to an audience that has a background in buying loans and real estate. Sometimes when I speak about purchasing first mortgage loans, a question I often get is “what happened to the bank?”
Let me paint the picture for you with a scenario. I purchase a loan from XYZ Lender on a home with a current property value of $200,000 and an upside-down loan balance of $220,000. I buy the loan at $120,000 from XYZ Lender and reach out to the borrower to work out a solution. Many potential loan investors struggle to understand what happens to the XYZ Lender’s rights in the transaction. “What happened to the bank?”
Many of you have already guessed, but the answer is “I AM the bank!”. I purchased the loan FROM XYZ Lender, so they are completely out of the transaction. I take over their rights as I am now the lender. Many struggle to understand that concept.
The next question I often get is “Why would a lender sell a loan at a discount?” That’s a great question and there might be many answers. For instance, they might need liquidity for their operations. They might have many loans of a certain type or in a certain location and this particular loan might not fit their plan or criteria. They might even be getting out of the business. There are many legitimate reasons why a lender would sell off a loan.
People tend to forget that when you buy a loan, you are becoming the new lender that owns the loan. The borrower now legally owes you, not the previous lender that sold you the loan. They are out of the picture. It might be a difficult concept for many to understand, but it is a common practice in the note industry.