[Note: To follow is an excerpt of a second interview with Bob Diamond, a practicing real estate attorney, real estate developer, and published author of three books on foreclosure investing. To listen to the show archive or download an MP3, go to www.IncomePropertyInvestmentTalk.com/051309.]

Essa: (co-host J. Dean Essa): Do you think there is a greater likelihood that more businesses will have trouble meeting their obligations on commercial real estate loans?

Diamond: Yes. It's pretty clear that there are a bunch of mortgage backed securities that are going to be coming due over the summer and all through next summer. Banks have no intention of renewing those loans or extending additional terms. There are actually a whole bunch of players lined up on the sidelines who have aggregated money and capital to buy those notes and take the properties.

Essa: Interesting. What do we do about it?

Diamond: This isn't about people who don't want their properties. These are people who do want their properties. The notes are being sold at deep discounts. Your lender is either going to take .60 or $.70 on the dollar from a third party or they are going to renegotiate the terms of the loan with you as the borrower. One thing with loan modifications that everyone needs to understand is that the banks are acting in what they perceive to be their own best interest. So, if they can get $.85 on the dollar out of you, they are likely to look at that and take it seriously and maybe even do it rather than take 60 or $.70 on the dollar from a third party. Now is your time to enter into those negotiations, not six months from now and if you are starting to default or having financial stress, you should start talking to them now.

Essa: Is this new or has it been going on behind the scenes?

Diamond: It has been going on forever. Commercial loans have always been renegotiated typically between the borrower, the borrower's attorney, and the attorney for the bank or the bank loan officer. One of the differences between commercial loans and a residential loan is that residential loans are designed to fit in boxes. There are certain parameters with loans to value and types of property and qualifications of borrower's debt to income ratio things like that and they have to put them into very strict parameters so that they can be packaged and sold if the bank wants to do that. Commercial loans have always been done as customized products and the larger the loan the more customized it is. Commercial loans are done on a one-off basis, which means that there is a loan officer that is associated with the file.

Essa: [Everett, caller, from area code 808]: I own a reasonably sized multifamily property and want to know if there are any significant differences between doing a loan mod on a multifamily versus anything else?

Diamond: Yes, completely. First of all there is going to be a loan officer that is assigned to your file. Your loan could be owned either as part of a collateralized mortgage-backed security, which means it was sold to Wall Street -- a fancy term meaning that the loan was actually sold off to some investment pool either serviced or owned by the bank. If the bank owns it, it is much easier because you're not dealing with two parties in negotiations. If you are borrowing money for smaller projects, you're much better off with small, local banking institutions where there are four or five branches rather than going to large institutional lenders who just sell things off because it becomes so remote it's hard to work anything out. Your best approach is to go up to them, show them your updated financials because they are going to want to see that, show them your bank statements, and let them know what is going on. The first thing you should ask for is either interest only or an interest rate reduction and see what they can do with that. It might be temporary, maybe two or three years until you can get your rental rates and occupancy rates up.

Hanks (special guest co-host Nate Hanks, Co-Owner of Salt Lake City based RealSource.net): Can you help explain the difference, if any, in the negotiation process depending where you obtained your commercial loan in the first place?

Diamond: The process is similar but your success rate and how much you can trust what the loan officer tells you is different. If the bank owns it and the loan officer is responsible for it he is speaking with much more authority than he could speak with if he is just working through a third party. Essentially, if your loan officer has to go back to the investors on Wall Street with whatever offer you have, it's like anytime you negotiate with a third-party, what you say to that loan officer may not get translated correctly back to the people on Wall Street and the people on Wall Street don't see you sitting there across the desk. They can't evaluate for themselves from your body language and everything else how serious you are being. It's much harder to negotiate a successful resolution if you're talking about a mortgage-backed security.

Essa: If an owner of a commercial property feels like he or she is about to go into default, should the first call be directly to the lender or should the first call be to somebody like you who can actually handle that process for them?

Diamond: For most people, they are better off working with their professional attorney. The attorney can let them know where their leverage is. We will look through long documents and see if we can find some errors in the documents, which can make a huge difference.

Hanks: Does the size of a bank matter?

Diamond: The two violations are from the largest lenders in the country and one is from a small lender. There wasn't a lot of quality control. Losing documents can put a bank in a world of hurt. If they lose the disclosure forms that you are supposed to sign when you get the loan and you don't have proof that you ever got those disclosures, they can be in violation. The technical term for it is the Qualified Written Request; a request that the bank provide copies of the documents that it has.

Hanks: What is the possibility of getting a principal reduction when you are negotiating with these banks?

Diamond: On the scheme of possibilities it'[s the last thing the bank wants to do. It doesn't mean that they won't do it but your more likely options are to reduce the interest rate, to extend out the term, get some interest penalties and late fees waived, or if you have a lump sum past-due, get that folded into the mortgage. The principal reduction is the hardest to get from a bank. Remember, even if you get a principal reduction, say 10%, it doesn't change your payment that much.

Essa: Are there interesting investment opportunities available today?

Diamond: Defaulted mortgage notes. Nate, guys syndicate and purchase defaulted notes. Don't you?

Hanks: Yes we do.

Diamond: I think you guys are going to have over the next 24 to 36 months just an incredible set of buying opportunities because I'm seeing the notes on the market and you can only buy them in big traunches. You can't go and buy a $500,000 note and get a very good deal on it but if you go buy a couple, 10, 20, $30 million worth of notes, you can steal these things.

Hanks: That's an interesting point Bob. We as a company are able to participate in a bank that failed about a year ago. It's called Arkansas National Bank. The FDIC took them over and they sold off 1.1 billion in notes and we were able to buy that traunch of them. There is another conglomeration of three or four banks that the FDIC is putting together and my understanding is it's two or $3 billion worth of notes that they are putting onto the market. So, there is unique opportunity at this time period and is one of my best friends is always said a recession is an awfully hard time, it's bad news to waste a recession because when everyone else is running and burying their heads in the sand and doing things, it's a great opportunity to get out there and take advantage of what is available on the market. You need to find those opportunities and then seize them and go for it.

Diamond: There are huge opportunities in recessions. There always have been because people run away to far and it leaves behind assets that nobody wants. So as far as the value on them, there just is no value. If you come in as a buyer with some cash, you can scoop these things up for nothing. It's like going to the cafeteria at the end of the day when there is no food left over and they're about to throw it away. You say I'll take that, how much is it? They tell you give us $.10 for it.

Essa: Nate, is that something that our listeners could participate in?

Hanks: Yes. Interested parties should complete a form at www.IncomePropertyInvestmentTalk.com/051309. We will call and can go through the list of assets and see where their desires are.

Essa: What is your golden nugget for today?

Diamond: Have faith. This too will pass along with everything else. Survive like Winston Churchill, who said, "if you're going through hell, keep on going.”

Published: June 5, 2009

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Peter L. Mosca is president and founder of BAK Communications, Inc. He has over 22 years of communications and media consulting experience, serving a variety of nonprofit organizations, including the CCIM Institute and the REALTOR Association on all three levels – national, state and local. He is the Spokesperson Trainer for the CCIM's Jay Levine Academy and trains hundreds of residential REALTORS nationwide to be effective industry spokespeople. He is consistently ranked as "excellent" by about 90% of those who attend his presentations. While his principal consulting focuses are public speaking and media relations development and content delivery and management, Peter is also the host of the Voice America Network's weekly radio program, "Income Property Investment Talk," a one-hour program that brings the powerhouses of commercial and residential real estate to property investors every Wednesday at 11 a.m. EST. Peter is married 17 years to his wife Barbara. They have two children: Ashley, 15 and Kelli, 12. Hence, the name BAK Communications, Inc.