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Main Street has been buying, fixing, and selling mortgages for over a decade. We’ve been investing in them for even longer. Occasionally, we are asked what makes a good mortgage investor or partner in a mortgage investment. Wow, what a question.
There are so many things that make a good investor; money, of course, and a risk tolerance within the investment range, and even a sense of humor come to mind.
So how to answer this question?
Of all the qualities that come to mind, I am reminded of a story that I was told recently about a mortgage that was purchased. The numbers don’t really matter in this story. Isn’t that strange? We are talking about investing and the numbers don’t matter.
Think about that for a minute as I relate this case study. When the loan was purchase the note was delinquent for nearly 5 years. The borrowers should have been removed from the property but times are different these days. Lucky for them! These borrowers had an okay income, but they had spent too much, had liens and judgments against them, and other debts that were extremely difficult to pay off.
So they started to default.
Well, along comes our investor. You know what the first thing they do is? They (they were a team, actually) went and personally knocked on these folks’ door. Know what happened? Nothing.
So they did their usual campaign, they sent letters and notices, etc. Not until they sent the notice of foreclosure, some 5 months after they first received the loan, did they get a response.
The couple pleaded with these investors to save their home and not kick them out. They pled their case, explaining about surgeries and alimony and other bills that were heavy burdens. Although these investors had every right to expel these people from their home, they took compassion and worked out a deal for them to keep their home, pay off their debt and maintain their dignity.
Now, as I told this story, what are the things you noticed? What are the qualities of these investors?
Let me tell you what I saw, which is also the answer to the question above: What makes a good partner for a mortgage seller? In other words, what makes a good investor?
When you invest with someone, whether in a private business like these two or through an institution like Main Street Capital, you need to look for certain personality traits which will show the true character of these people. And you want someone with integrity and character, they are the ones to trust and continue to do business with.
So, I noticed many things, but these three stand out particularly well. These investors showed empathy, they had patience and they weren’t afraid to take a little risk.
When we talk about investing, there are several degrees of tolerance.
First there is no tolerance of risk.
These folks cannot stand the thought of losing any money and so either stick their cash under the mattress or in a low-yield bank account. Sure, their money is there, but it becomes less valuable every day.
Next is the moderate risk takers.
They buy stock and bonds for modest, but okay yields. If they lose a little cash, that’s fine because they are in it for the long term and know they’ll make it back.
Finally, there are the big risk-takers.
They have large sums of money in sometimes crazy portfolios. Penny stocks and non-performing mortgage notes come to mind. There are ultra-risk takers, too, but they have no bearing on our discussion today.
So, what makes a good mortgage investor and partner? The investor willing and able to take a risk. The ability is key. If your investor or partner spent their last dime on that mortgage note, that’s a big no-no. They will be too anxious to get a return and will not have the next quality.
Sometimes it takes a little time to start getting money back, let alone get your entire investment return.
I knew of an investment in a non-performing note a man made once that didn’t pay anything for nearly a decade. But when it finally did, it paid well. When I asked him about it, he said he viewed it as a long-term savings bond. You know, the kind your grandma gave you and said in twenty years this will be worth $25? What did we all do as kids? We went and cashed it in for $5 so we could go buy candy at the store.
Don’t do that.
Instead take my friend’s approach and view these investments, even if they aren’t working yet, as a long-term plan to get money later. That friend made 20 times his investment. That would’ve been like that bond being worth over $100. Just for waiting a little. Remember, though, he had a large risk tolerance.
Many people think they have empathy, but are only practicing sympathy. The difference is feeling sorry for someone’s situation and truly understanding the way they feel. When we tell our children to take a time out in a corner for 5 minutes, we usually feel some sympathy for their plight. They can’t do anything for 5 minutes. Hmm, must be terrible.
When we come to an understanding of their point of view, though, that time out takes on whole new meaning. They are stuck for near an eternity from their small worldview and experience. All for something that may have seemed very logical to them. Still, even with empathy, we understand that they, too, will ultimately benefit from the discipline.
Can you feel the same about a borrower and their situation?
In a couple of weeks, I will tell a room full of investors that they need to remember that there is a living, breathing, feeling soul behind every loan they touch, every mortgage they handle; and every type of action they make toward or against those loans has sometimes dire consequences for that soul.
Every home has a heartbeat.
Now, sometimes foreclosure is the appropriate choice. Sometimes there is another option, though. As investors, if we lose sight of that and only ever pay attention to the money, we can lose our humanity and become that unscrupulous, greedy banker that the public reviles.
Not only that, but we can also develop a reputation among other investors. Think about it, there is likely someone that you know or know of that you wouldn’t do business with if someone paid you. I know I can think of half a dozen, easy.
Anyway, this brings me to my last point. The best partners always look for a win-win solution in all their dealings. Just as in everyday retail or other business, a true win-win is not just desired, but critical to the success of the business. Think about it for a moment, what would happen if you “won” every piece of property in your portfolio by foreclosing on it?
You’d all of the sudden have a lot of property and no cash flow. That’s not the situation I’d like to be in, and I don’t think that is the situation you’d want either.
As I conclude, I will pose three questions, and the “whys” of these questions, to help you determine if you need or can even be a great partner in the distressed mortgage industry. Now, these questions are best asked at the beginning, after you take possession of the loan.
1. How can I keep the borrower in the home?
a. Borrower wins because they have a roof. Investor wins by getting a better return, because someone is actually paying them income.
2. How can I maximize my income while keeping them there?
a. Investor wins with an income, borrower wins by having a stable relationship with their loan owner and staying in their home.
3. When it is time to exit, how can I protect my investment as well as the borrower’s interest?
a. Setting up a stable repayment plan and having it contracted protects both parties from unscrupulous predators later.