Welcome to the Self-Storage University Podcast, where you will learn the correct way to identify, evaluate, negotiate, perform due diligence on, renegotiate, finance, turn-around and operate self-storage facilities. And your host is a partner in one of the largest real estate portfolios in the U.S. with nearly $1 billion of holdings, Frank Rolfe.
Most self-storage properties that have a mortgage are just fine. They make their payments every month. Ultimately they pay the property off and they go their merry way. But some self-storage properties end up in default on the loans. And that can create a problem, obviously for the borrower, but sometimes an opportunity for a buyer. This is Frank Rolfe, with the Self-Storage University Podcast. We're gonna talk about dealing with self-storage properties that are currently in default, how the system works, how you can buy them, what to watch out for. Now, the first thing you have to know about a default is there's two types. There's a default for not making payments. That's one variety and a second type, which is what we called the default. And that's a term default. What happens there is the storage property comes up, the loan ends, the renewal comes up and they can't find a replacement.
So no problem with the property, made all their payments, but they just can't refinance that self-storage property. So when a property falls into default, either because of non-payment or because of term default, typically, then it falls back on the lender and the lender has to figure out what to do with it. Most lenders, upon default will try and work with the borrower to come to a happy solution. But if they don't see any manner to work the loan out and get their money back and interest, then typically they'll take action, which often leads to foreclosure, or they can sell off the defaulted note, one of those two variety. And they'll often take the thing either to an auction or they'll place it with a broker to be sold. So where do you come into this situation? What can you do to do it? Well, the first thing you have to know about working in the world of defaulted mortgages on self-storage properties is do not get involved in what's called tortious interference of business.
It's kind of a nebulous law. You can read up on it, but what it basically says is, in a nutshell, you can't do or take actions that accelerate or cause something to be defaulted. So if you knew of a self-storage property that was doing poorly, you know this because you see there's huge vacancy there and it was built recently. You figured they have a huge mortgage. You can't figure out who the bank is and go to the bank and say, Hi, if that thing defaults, I wanna buy it, because that might trigger the default. The bank might say, wait a minute, why does this person think that thing is in trouble? Let's look at the records closer. Oh my gosh, this thing is it's way behind an occupancy. Oh my, we need to default. That's called tortious interference. So in talking with lenders, if you want to go out to the marketplace and look for these properties, what you're gonna have to do is go to lenders and say, look, I buy foreclosed storage facilities, something extremely generic and don't say, take my word for this.
You need to read up on tortious interference. Maybe talk to an attorney or two. Make sure you don't fall into that trap because a borrower who is in trouble is like a wild animal that's been cornered and you don't wanna wanna have anything that anyone can possibly claim you are responsible for. Also, you can sometimes just buy the defaulted note. You don't have to wait for the storage facility to go to auction. You can simply go to a lender and buy defaulted notes. Some people, that's all they do is they just buy defaulted notes. Why is that? Well, you can get defaulted notes in an even bigger bargain than you can if the property has been foreclosed on. 'cause the bank then doesn't have to deal with what to do with it. So if you've got a mortgage and it's in default and you're a bank, the quickest, fastest, easiest way is simply to hand that hot potato off to somebody else to deal with it.
And we have found that there are opportunities in buying defaulted notes if you know what you're doing and the big thing you have to do to buy defaulted notes properly is to have a mechanism that's a 100% within your control to take title of the property. And that's typically called a deed in lieu of foreclosure. That's where that person will signs the property over to you without having to go through the foreclosure step. You can often facilitate that by simply offering to drop the personal recourse with whoever the note holder is. Let them off the hook and just take the property as your only recourse and not go after them personally for the deficiency, it's kind of shocking that many lenders don't realize this because there's many deals that have been bought as defaulted loans that the banks themselves could have easily remedied and simply taken the asset back cleanly if they had simply dropped the recourse.
So there's one method you can definitely have a better shot at getting the thing resolved than the bank can. Also never think that the bank carrying the debt that's in default is not a potential banker for the property. Because one issue that comes up in defaulted notes often, is this feeling like, well, who would make a loan on this since it already failed once. We all know that a restaurant that's failed is almost impossible to reopen because no bank wants to put their name on a note on a building that had a restaurant that already went under. It's already starts off kind of in a bad position, like it's a failed location. But often when you have a property that's in default, the bank could well be a willing and your top prospect to create the note. So sometimes in a defaulted note, the biggest issue is just bringing it out of default, getting the payments current if it's just a fact of payments not being made.
So you always have that tool potentially to help you get that mortgage. Also, when you deal in defaulted properties, you have to move very quickly because many people sense them as being underpriced and therefore they wanna jump on them quickly. So when one pops up, you gotta move fast. You have to go immediately, just jump in your car and drive out to that property or start the conversation, the dialogue to try and get it under contract. 'cause you know that many, many people will be doing the same. And you have to be very user friendly in defaulted notes. 'cause you know the bank doesn't have all the information. It's probably in default. They don't really have the financials.
They don't really know the occupancy, they don't really know a whole lot. All they know is what they knew when they made the loan, which is here's the location, here's how many units we think it has. But beyond that, they don't know a whole lot. Often when you go into default, the borrower is hostile and stops all contact with the bank and deprives 'em any of the knowledge that you want. So if you pepper them with a million questions, that's not gonna work for you because they're not gonna have a million answers. You're only gonna annoy them and make them more likely to go onto someone else. But a big issue when it comes to defaulted notes is that not all property should be bought in default. So just because a storage facility exists doesn't mean it should exist.
The location may be too weak, it may be too difficult the access, there's a million reasons why it did in fact fail. Don't buy things that failed just because they failed. Some people have this idea that they can do nothing but buy defaulted mortgages and do well without any real due diligence. They think that simply by being a better operator, a better marketeer, they can get the things occupied. But that is not always the case. I've seen many, many properties throughout America that failed and they just need to be moved onto another use. Scraped, maybe turned back into farmland for all I know. But don't be lulled in the complacency that every deal that defaults is an opportunity. They're not. Some of them can be and you can get really good prices on them, but some are best left alone. This is Frank Rolfe, the Self-Storage University podcast. Hope you enjoyed this. Talk to you again soon.