Workouts: How To Manage Financially Struggling Borrowers & Tenants
The data suggests that there is a huge wave of financial distress coming down the pipeline. What does that mean for investors who largely rely on their, and their money managers’ approach to workouts?
The numbers suggest that consumers and businesses are running out of money. Inflation is hitting home, credit lines are being tapped out, savings are being evaporated, employment is becoming scarce, and income is being hampered in many ways.
Of course, this trajectory could be turned around at any moment by one new piece of legislation or a new approach to monetary policy by the Fed. We’ve already seen increases in non-performing auto loans, business loans, and real estate loans though.
Yet, times like these are when the savvy become the most wealthy thanks to investments in real estate, while most others fail.
It’s All About The Workouts
Even though some of the biggest banks now say they don’t expect a recession, the data suggests there is going to be some financial stress out there anyway.
If your portfolio is big enough, then you are bound to have some foreclosures or evictions, regardless of how well you handle them. Even though undesirable, when done right, these can still be winning scenarios. When they surge, the winners and losers, and survivors and those that thrive are greatly differentiated by their approach to workouts.
While there are many complex factors involved, banks and other creditors seem to have learned nothing from the 2008 crisis when it comes to this. Or they have new staff that wasn’t taught the lessons learned. That, or they are so desperate, they have no choice but to act the way they do with their consumers.
Whether in the wake of a hurricane, job loss, or medical emergency, all banks and creditors seem to advertise that they want to help if their borrowers just get in touch. Then all too often, they simply tell these borrowers that they can only help if they catch up on the payment immediately. Which is really no help at all, is it? Worse, they are just burning all the trust and credibility with those customers, who will never attempt to contact them again or bother to try and pay, even when they have the money.
In contrast, if one out of 10 of their creditors does voluntarily offer real help, that is likely to be the one creditor they are going to pay, no matter what. They will go above and beyond to save that relationship.
A great example of this is during the recent Hurricane Idalia. Consumers were reporting that American Express was calling them for payment right during the eye of what was a category 4 hurricane. Capital One, on the other hand, offered to set customer’s minimum payments to zero for one month, defer a month’s payment, and waive late fees. It just makes sense when banks are closed for two weeks due to power outages anyway.
When you are considering how hard you want to be on borrowers you’ve financed, renters in your properties, or those who owe on mortgage notes you hold, here are some more quick thoughts on why offering workout plans is worth considering versus the tough guy approach.
- It’s better than desperate people robbing you in the street to house and feed their families
- It can be more financially profitable for you, with extra interest, payments, and fees
- You’ll feel good about what you do
- You’ll build loyalty and increase lifetime customer value
- You’ll win market share and market position
How To Approach Workouts & Win
Workouts can take numerous forms. These range from skipping and deferring payments to modifying loans, altering interest rates, granting short sales, loan extensions, and more.
If you are going to do them:
- Do what you say you are going to do
- Protect your assets, timeline, and legal position with proper notices
- Leverage experience and actual intelligence to know the difference between being taken for a ride versus good customers genuinely needing rare help
- Provide workouts that make sense and are not predatory. Consider probation periods, with consequences for not following through
- Connect them to other resources that can help with jobs, charities, utilities, and healthcare
When you get this right, you can acquire great assets at fantastic prices, and unleash incredible value, while maintaining far more consistency in your portfolio than the majority of individual and corporate investors.
Find out more about investing in secured debt and real estate, go to NNG Capital Fund.
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Photo by Andrea Piacquadio