Defaults - The Lessons
Updated: Apr 6, 2021
Lessons learned over 10 years
At Ignite Funding, as a Trust Deed investment commercial broker, loan servicer, and asset manager (as needed), there are thousands of details and hundreds of hours that went into the defaults and ultimate workout strategies. In short, here are a few lessons learned over 10 years that have been or will be implemented.
Google maps does not cut it! If you are venturing outside your backyard, then get on plane and walk the property before lending on it. Get to know the area within a 20-mile radius. Do your own boots-on-the-ground market research as you cannot depend on what others tell you.
Rinse and repeat. Property visits should not be a one-time visit. Visit the property during the lending lifecycle to determine the speed in which the borrower works. This can bring light to red flags during these visits, and when borrowers know you will pop-in they tend to be on their toes with your projects as most private lenders do not do this regularly.
Do a sniff test on all new borrowers in-person prior to lending. I know there is technology out there to allow virtual meetings, but it does not allow you to enter their territory and see for yourself how the company is run and who the people are behind the scenes. They say you can tell a lot by the cover, but not with lending.
Rinse and repeat. As most borrowers are small to mid-size homebuilders and developers, they are growing companies and with growth comes growing pains. If you do not make regular visits you will not know when cracks are forming.
Established borrower relations puts your company above others, even in a pandemic if they are choosing which lender to maintain consistent payments.
Know when to hold them and when to fold them. Even though it is clear there was misappropriation of funds, sometimes the cost of the legal fight is not worth proving a point. You can prove your point with investors losses with a borrower by hitting them with huge 1099-Cs (Cancellation of Debt) that has tax consequences they did not see coming when they think they pulled a fast one on you.
If a borrower is bullying you to fund a loan, walk away even if the investment has a lot of equity left on the table. Never let a borrower dictate funding dates when they own the property free and clear as desperation is a factor. Make sure the borrower is not lining their pockets upon the funding of the loan.
If a borrower tries to pull a fast one and file bankruptcy to protect the equity in the asset, play hard ball and get a Lift Stay quickly as they will not expect you to fight for investors.
Take the time to determine the most advantageous default option prior to presenting to investors even if investors are pressuring communication. A default is scary for any investor. The options presented need to be informative and concise and without ample time to determine all options available to investors, it could result in the loss of capital. So, if it takes a few extra weeks, know that not all stones have been turned over yet.
Forbear versus foreclose. Collateral investments are far better than noncollateralized investments. However, foreclosing on collateral can come at a cost. Because we develop borrower relations (in-person) they tend to be amenable to working with us when it comes to workout strategies. And yes, I do use these relationships to our advantage if it benefits the investor outcome.
Just because you write it does not mean investors will read it or understand it. The Default Guidebook was created as a roadmap to answer the unknown. The Default Portal was developed to keep investors in the know. This does not mean that investors do not need a call to explain further, which is why Customer Service Representatives are now available on staff to assist not if but when defaults arise.
“If I had a crystal-ball I would use it,... What I can tell you is that we never stop”
If I had a crystal-ball I would use it, but like you, I do not. We are not perfect, as we cannot predict borrower fraud, owner disputes disrupting business or real estate market corrections due to economic meltdowns. What I can tell you is that we never stop researching market drivers and asset types to stay informed on market supply and demand, so our investors diversification options allow them to participate in mitigating their investment risk.