How to buy non-performing notes from lending institutions?

Question

I'm examining the strategy of buying non-performing notes in my area from lending institutions and wanted to know if anyone had experience with this?  Specifically, who to speak with at the bank?  How to get banks to talk to you?  How to buy specific notes instead of bundles?  I'm also interested in hearing about different exit strategies besides having the note payor refinance or foreclosing on them.  Thanks

Doug Smith · Answer

I could write a book on that subject. I was a banker for 20 years before leaving to form Castle Rock. We buy non-performing loans from banks and hedge funds. Rarely did a day go by when my phone didn't ring with someone that was going to solve all of my problems as a banker by buying my distressed debt at 30% of it's value. At the peak, I was getting 4 or 5 calls every day. It got to be really, really annoying. Bankers aren't stupid. They know what they are doing, but their motivations are different than yours. Don't expect to get anywhere with the branch manager. They have no authority to sell and probably wouldn't know where to begin or who to even call.

Many will call loss mitigation/special assets officers and ask to buy debt. Now, think about their motivation for a moment. Seasoned bankers know that banks will preach loyalty, loyalty, loyalty, but will lay you off as soon as it is convenient for them. A special assets officer is given a handful of assets to manage and work-out. The bank wants the problem solved, but does the special assets officer? What happens when they do a bang-up job and solve all of the problem assets? You guessed it...they get shown the door as there is no more work to do.

We were successful because we knew many of the people we bought from from our former banker days. The first deal I bought was on commercial strip center in my area (Tampa) from my old boss. Later, we moved into residential and we started buying from funds that had bought large traunches of loans but didn't really want the non-performers. There again, we had an in as one of the other Castle Rock principals also is a principal of a large, National title company that works with a lot of hedge funds.

My best advice would be to find an established form that will be willing to sell one-off loans and prove to them that you can be a reliable, trustworthy buyer. We are scared to death to sell to people we haven't worked with because, 9 out of 10 times, they say they are a buyer, but are in fact a broker/wholesaler that takes confidential information on our borrowers and blasts is out all over social networking sites trying to find a buyer to flip it to. Unlike real estate, a loan package includes personal borrower information that must be protected.

You may struggle to find discounts if you are targeting specific properties or neighborhoods. We found it helpful to be open to buying in other States. The best discounts are gotten when institutions have lists of loans they are willing to part with rather than you going to a lender and saying "I want the note on 123 Main Street." You probably won't find much of a discount from the current market value of the collateral property.

I hope that helps. It takes a lot of work and isn't as easy as one might think, but it can be done. Good Luck!

Dion DePaoli · Answer

Michael,
	
	Doug and Bill gave good insight into local bank inquires.  It does, however, sound like you may want to sharpen your skills a little before broaching the topic and playing the one or two cards you may get and losing.  The bank is not going to be a willing teacher and you will need to understand where you need to purchase the note (level of discount) to accommodate the disposition of the loan.  This includes knowing when the bank is priced too high and understanding when you may be priced too low.  
	
	A broker can be a good resource, in both finding deals and learning more.  However, not all brokers are made the same.  I would substitute broker for more of a mentor, someone who is actually investing themselves not just trying to broker.  Maybe you arrange a co-investment with them or you do some of the work they need done, although disposition of loans is not a short term project so this method would have it's barriers to expose concepts to you which are unknown to you.  
	
	The public interest in notes has grown over the last couple years, although the industry has been around for ages.  As such, there maybe credence to attending some local REI club meetings and seeing who there is a note investor or has experience as one.  
	
	As Doug and Bill point out subtlely, with limited capital an investor does have to put on an "opportunistic" hat on.  Even with large amounts of capital, and perhaps contrary to popular myth, even large capital investors are subject to the same idea.  Buying loans is not a Burger King drive up window, you can't always have it your way or get what you exactly want.  While everything has a price which can consummate a sale not all make sense.  As such, the Seller is likely only willing to sell what they are willing to sell at reasonable prices.  So having a mentor will help you understand this approach in many cases as well.  I don't know if you really need to leave your geographic area and venture into other areas far away from you but you will have to learn to deal with some of the good and bad in your area of interest.  That is what will make your phone ring.  Anybody can dispostion easy nice assets, the tough stuff is what tends to be up for solutions and potential sale.

Doug Smith · Answer

Account Closed If someone contacts them about a specific note, a bank is going to want closer to "book value" for the note (something a bit lower than the appraised market value of the underlying collateral). If you buy the note, you are going to have to complete the foreclosure process (attorney fees), pay back taxes, and worry about the current owner pouring concrete down the shower drain. You may not get enough of a discount to make it worth your while. You can try calling the institution that filed the Lis Pendens or, in some cases, the attorney that his handling the foreclosure, but I wouldn't count on a return call or even finding the right person to chat with. In most cases with FNMA or Freddit Mac loans, a large servicer is handling the file. They tend to be a bureaucracy and they don't really have an interest in helping you or the borrower. It's not their money. I've found more success in letting the seller come to us with files they would be willing to sell rather than going to the bank for a specific note. If you go to the bank to buy a specific note, you might as well start with the actual homeowner and get a short sale contract to present. That way, at least you avoid the foreclosure/collection process. It can be done, it's just tough (with a lot of luck sprinkled in).

Account Closed · Answer

Thank you very much for all the great info @Bill Gulley, @Doug Smith, and @Joe Gore.  Bill those options are good ideas and I will seek out my local community banks to form those relationships.  Do any of you know of good reputable note brokers?  Also, what process do you go through when evaluating a note to purchase from a broker (whether local or not)?  Thanks.

Account Closed · Answer

Thanks for the information @Doug Smith.  I was asking because I get a list of people from a title company in town who have just received their 90 day trustee sale notice and was looking at buying their notes as one option.  They may not work so well based upon your comments about one off sales though.  Any recommendations in getting hold of these notes or is it better to pursue a different avenue?

Bill Gulley · Answer

Part of the initial question was about exits.

I'd say Dion gave some good advice as to getting with a fellow investor as a mentor and not so much a broker. You'll have different approaches in portfolio investing, depending on your investment needs.

I spoke to a friend the other day, he's 86 and owns about a third of the downtown area about buying discounted notes and what all you can do with them. Being an old, savvy, sharp RE investor who had done financing in years past, he was amazed at the opportunities and profit tactics that can be used.

My point is, that you need to be aware of what part of the note business/investing you want to do, identify your investment needs and then seek others with that expertise. Just getting any mentor, like my old friend, won't help you much unless that person is aware of the best alternative to meet your investment requirements or goals.

How do you do that? I'd say first make a plan, but I can also tell you that your funds and opportunities may not allow a Burger King approach as Dion mentioned. So, IMO, the trick is identifying the opportunities that exist and then finding ways to fit such into your plan, Not all opportunities fit, you can't force a deal, it has to flow into your operations.

Doug is right that you may not get deep discounts walking into a bank. Going the route I described catches loans at the slow pay stage, pre default or default and at that stage they are not really eating up profits and causing reserve issues as an old note in default for 6 months that has not been acted upon due to back logs. You won't know what your local bank has until you ask.

Consider too, that the amount of the discount is not the only factor to consider with a problem borrower. They can have significant equity, the property may need some repairs or updating to bring it up to market. If a borrower can't make payments they usually can't afford improvements. You can work out a note purchase a few thousand below the balance based on costs to the bank. You can then advance funds for repairs, along with an agreement to acquire the property, allowing a sale that allows the seller to walk away with something, you real money is from the sale and I see you're an agent, so there's a tad more in commissions depending on how you structure your deal. It's not all about buying a note, modifying it and sitting there collecting payments or flipping a note.

Need to think out of the box, look for the money through the entire process and along all the transactions that cure the problems. :)

Bill Gulley · Answer

Michael, what I'm seeing is you staying in your back yard with local title plants cluing you in. I also assume you are a Realtor, not a mortgage broker, institutional note buyer or buying bulk off tapes, that's a totally different world from an investor dealing in his personal portfolio in a local market.

I'm not familiar with Gilbert, AZ, I'm guessing you have national and state banks. As Doug mentioned, you need to get to those who can make a decision, that means smaller and regional banks will be easier for you to work with. If you go to BoA, you may need approval out from out of town, the guy sitting in the President's office of First State Bank of Gilbert can shake your hand and say take this off my hands. (Well, not that easy initially, but you get the picture).

Two things you will need, knowledge and money, having that you can put yourself in a position as the guy to call when things go south.

I could write a few books on your question as well, but a simple way is get to know the loan officers in the smaller and regional banks. They are the first to know the status of their loan portfolio. When their portfolio has problems their pay check can get smaller so they are motivated to get things worked out.

Now, I'm not saying these loan types call you up and say go see Mary Jones, they can't go there, but what you can do is train them in what you can do. In short, they contact their borrower having issues before they send notice of foreclosure, they can explain that you MAY be able to assist them. They can't and won't really endorse you as a solution, but they can suggest options and who might be able to contact that can help them.

My phone rang from bankers and borrowers, in my area where I could meet with either or both to work things out. Drive by the property and see what the deal might be.

Very few loan officers or bankers in small communities want to foreclose and toss some customer out the door, there are some bad borrowers you can't work with, let the bank send those off to out of town brokers or buyers, you don't want them anyway. If you can show a bank that you can perform, get them out of a bad loan that they can't keep, at the some tolerable loss and help their customer, keeping in a better community favor instead of  being known for foreclosing on customers, you'll do fine, really, better than fine you can do great.

If you can work out deals, taking a deed in lieu, for example, make simple repairs, get the property sold, some cash for keys or even some equity and take the bank out you'll be a hero. Possibilities are almost endless, in some cases I could work with the borrower under contract, the bank would agree to a payoff and the bank got their money when the property sold. Much like a short sale today but a better deal for all. Banks are not required to do a short sale so there are possibilities of doing similar workouts. Lots of options, but the key to this side is having a good relationship with local banks.

I mentioned this basically, in casual conversation to a regional bank officer (having authority) and he was very receptive telling me that if I was interested to call him and we'd put something together, but my thinking was to taking them all, not cherry picked. It's still a consideration but there are bugs to be worked out as I know there would be trash.....but, there's no rush.  :)

Account Closed · Answer

Non performing notes are money makers, but you will have better luck dealing with a note broker then a bank, unless they know you, and you have millions of dollars.

Joe Gore

How to buy non-performing notes from lending institutions?

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