The fourth key principle to a real estate workout: Bad is Good

Minneapolis real estate attorney John Koneck discusses his fourth principle to a real estate workout and explains what he means by “bad is good.”

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Now you’ve asked me what I mean when I say the final principle is bad is good. Think about the richest person in the world. Let’s say that person defaults on a loan, a mortgage loan owed to a bank. How worried is the banker going to be about the ability to collect that loan? Not very worried at all because the borrower’s the richest person in the world and has tons of cash to pay that loan back. In that situation, the borrower doesn’t have much negotiating power ’cause the borrower has money to pay the loan. The lender has a lot of negotiating power because it can get a judgment against the borrower and collect out of the borrower’s assets.

Now let’s change the facts. Let’s say the borrower has nothing, no money, and the lender says, “You know what? If you don’t pay me, I’m going to sue you.” Well, what’s the borrower going to do? Probably just sit back and yawn and say, “Well, so what? I don’t have anything for you to get anyway.” Now that’s power, to be able to say to the lender, “There’s nothing you can do to me that will hurt because I have nothing to lose.” And in that situation, that gives the borrower strength because maybe the lender has something to lose. Maybe the lender doesn’t want the property back or maybe the lender is afraid that a judge or a jury might sympathize with this borrower because the lender did something to put the borrower in its bad financial situation.

And that’s what I mean bad is good. The worst financial condition a borrower is in, in a really perverse way, the more strength the borrower has in that workout situation.