Are the Days of The Individual NPL Note Investor Going Away?

Question

Good morning, everyone. I wanted to spur this discussion about the state of the NPL (non-performing loan market). So typically, this time of year is the busiest time where many larger funds are looking to get assets off of their books. This year is no different. The past few weeks we have received over $250M in assets for sale, but this comes with a big BUT.

This but is the assets are being sold in pools that all are $5M and above. So, i did reach out to several sellers to ask about their mindset and the overall consensus has been the same. Which is, medium size funds are tired of dealing with one-off investors and their lack of knowledge in the space. An example of this is we recently put out a tape of 30+ assets and we negotiated a price. A month later the buyer faded their bid by 50% for no apparent reason. Of the 25 assets we had under agreement more than 50% did not close.

So my question to others is:

1. If you are a main st investor, have you found it more difficult to find product?

2. Do you think this trend will continue? (Note I am not saying there are not one-off opportunities, but do you believe it will be more difficult for main st investors?)

3. Is one of the factors due to many training programs make this business seem like it can be learned overnight and the "just bid" attitude?

Jamie Bateman · Answer

@Chris Seveney this is a fantastic forum topic. I have seen this more and more recently, as both a buyer and seller of notes. For example, @Andrew Smith and I spent a good bit of time doing due diligence, pricing analysis, and bidding on a tape from a larger seller. We were originally told that breaking up the tape for our fund was acceptable. Finally find out that the seller changed their mind (or there was a lack of communication) and we had to buy the whole tape. Pretty frustrating after weeks of back and forth on this. Conversely, I have been dealing with a lot of inexperienced or shady buyers who don't seem to know what to ask and/or don't follow through.

Alecia Bolton · Answer

I echo what everyone else has said. 1. If you are a main st investor, have you found it more difficult to find product? Not finding product, but finding product that the numbers work for. I think a lot of sellers took advantage of the market conditions and people based their numbers off crazy numbers, which can get you in a lot of trouble if you're not experienced. It's hard to understand the difference of legal balance vs UPB and why you'd want to make sure your numbers work if you've haven't got the experience or training behind you. 2. Do you think this trend will continue? (Note I am not saying there are not one-off opportunities, but do you believe it will be more difficult for main st investors?) I think it'll be cyclical. I think there will be more inventory in the next year that will trickle down to the smaller investor. I don't know if those doing the trickling will have the patience to deal with the smaller investor though, for reasons already pointed out.It would be nice if someone would publish a 'this is the typical way to bid' guide. So that people know what DD needs to be done before they bid vs after. And while it can't apply to every trade desk, there is a general process that everyone uses. And that there needs to be better reasons to fade than "because I want to". But I can also see the value in the trade desks that are popping up, and wanting to use those instead of trying to sell directly to the small investors. 3. Is one of the factors due to many training programs make this business seem like it can be learned overnight and the "just bid" attitude? I don't know of any training programs that make it seem like you can learn this business overnight. I don't think there are very many training programs out there compared to other investment types. The challenge is that this is such a detail oriented niche, and if you don't have training or a mentor, it's really easy to not know something. And it's hard to put together training that covers everything, because every note situation is different. And while I don't think you should go out and drop thousands on training, I also don't think you should just 'buy a note' and try it, which is what I've seen other people recommend.

Ned Carey · Answer

@Abby Shemesh wrote Truth be told, we share that frustration on the lender side as we see many lenders that are detached from realty and simply do not understand how money works (which blows my mind). Big money is not necessarily smart money. I have no experience in this area but I will make a prediction anyway . . . Yes the trend will continue. And later the trend will reverse. There will always be opportunity for those that are smart and know how to adapt.

Kevin Crowell · Answer

@Chris Seveney very good topic. I echo Jamie's statement. 1) Looking at the numbers in the note platforms, it has become pretty difficult to find some really good deals. While you can find deals, it is a matter of quality over quantity. But it also depends on what you do with the deal, I guess and your own due diligence. For instance, you find a property that prices out at $150,000 and your own comp says it is really around $75,000. 2) Regarding the trend, I wouldn't think it would continue as rates continue to rise, but who can say? Main St investors have to be creative with their marketing and how they approach a deal, but can't just sit around and wait for good things to happen. It can be difficult, but not impossible (sorry, I love the Godfather).3) Finally, it definitely can be some of the training programs out there, but with some of the honest people such as yourselves, people have come to learn that it isn't as easy as it appears. It depends on who you trust, but that depends on the individual. You need to go with your gut. Great forum!

Abby Shemesh · Answer

@Chris Seveney this is a solid question. We too have are seeing frustration among lenders looking to exit on NPLs and their response has been the same... Most of the NPL buyers they are speaking to are not professional or communicative, let alone understand the NPL intricacies of the NPL market. Truth be told, we share that frustration on the lender side as we see many lenders that are detached from realty and simply do not understand how money works (which blows my mind). That being said, we are in the process reviewing a $350MM NPL pool of large commercial assets across the country in which the lender has continually voiced their appreciation of our communication and level of knowledge in the market, compared to others that they claim simply "ghosted them" and left them hanging. This should be the basic level of service - communication and knowledge. Of course they are a little unrealistic on price but what lenders are not? I think a tech platform will come along in the NPL space that will upend the norm and allow all flavors of investors to participate in the NPL market assuming there is enough value provided for the sellers/lenders to allow their assets to be placed on such a platform (unlike paperstac or resitrader). I am referring to a tech-software-driven approach as opposed to a Loan Sale Advisor with a tech component. Finance 2.0 will come in and make most of investors obsolete in the very near future unless we get a sturdy footing now and become the willow and not the oak. As to fade that occurs in deals and trades as you mentioned, I (generally) think this is part of a larger trend we are seeing in this uncertain and inflationary environment. We (at AMX) saw very little fade in the days leading up to and entering into the COVID era. From where I am sitting, the choppiness really starting to become consistent after the summer of 2022 with the FOMCs role in quantitive tightening (QT) ramped up. But like @Kevin Crowell stated in his post, who can say?I know I am all over the place in this post, but this is my two cents if anyone gives hoot. Thanks for starting this conversation.

Aaron Maleh · Answer

I couldn't agree more with this thread. I have been on both sides of the transactions and I understand why these larger funds hesitate to do smaller transactions. They're not interested in holding hands for a chance at a transaction, let alone man power to transact in smaller amounts is more or less the same effort as selling larger. It was a hard pill to swallow at first but then I directed my energy to like minded NPL investors to strengthen our buying power. Example if we know the fund wont look at us for under 7.5M and my capabilities are 4M we'd each take portions to play in that arena. Don't get me wrong theirs times where its extremally frustrating where I feel like I'm giving out free education for the potential investor to back out at any minute leaving me with the commitment of the transaction. Overall with figuring out how to sit on the big boys table your product will be better as well as your pricing.

Don Konipol · Answer

for the note purchasing part of our business - as opposed to the note originating part - we are seeing less opportunity with the parties we deal with, usually makes and with the SBA directly. We deal in commercial loans only, and the loans are in default either for buyer payments, loan maturity, covenant violations, or some combination. I think the note seller thinking reflects what they perceive as market reality. We're usually able to do 3-4 really profitable note purchases per year with commercial notes in the $2 - 4 million range (single note purchases). the difference for us is we come to the note purchase already having been dealing with the borrower.

Jay Hinrichs · Answer

also could it be that returns on new origination is such that the smaller investors are just defaulting to those investment options and only those that really want to low ball are trying for the NPL route and all the work and intricacies involved with it. for example Peer st.. platform you can pop on and get a 7 to 10% return in one click basically. or aligned with other HML ers out there .. were returns are north of 10% I had the opposite experience when i thought I wanted to enter NPL back in 08 we cobbled 5 mil together to buy a tape in south WA N Oregon had the money in escrow and all the joker brokers and mandate this and mandate that etc etc it was just such BS the assets were real I went to them they had lock box codes got into them .. but then I would see them listed and sold while we were in escrow for the tape.. so granted I was not experienced at all in this arena and after 45 days of our cash sitting there we pulled the plug . I found the best notes for us to buy was from thrifts Household finance types that were in foreclosure I would buy those 2 to 3 weeks from the sale date do a substitution and carry the foreclosure through and either own the asset or get paid off is someone else bid it.. we did quite well with that one until new management came in and would not sell many notes this way anymore. as for training I only know of the controversial ( being kind ) Scott Carson and Eddie Speed and I think Mr. Speed might focus more on seller carry back notes from private parties I know there are still plenty of people that solicit private carry back notes I get contacted weekly from them .. not as many as a few years back but folks are still dripping those assets and from what i know thats where the BIG yields happen or like what Don does.. I know we hit some grand slams buying the notes from the thrift as they did not want to bring the asset on their books at that time.

Randy Rodenhouse · Answer

Yes finding notes at the right price is hard to find. Many notes are selling at prices which don’t make sense for my business model. However, still finding some diamonds in the rough but you have to do a lot of digging. I have been in this space (buying institutional notes) for 10 years and so far this has been the lowest volume year for us. Note sells have seemed to pick up in October and November and probably through year end. I think the one off investors will have a harder time since the whole system is based on buying multiple notes such as getting insurance, servicing, field servicing, etc. Many of the selling counterparties want to make sure the buyers are reputable and I don’t blame them. This is a difficult business and not just anyone (in my opinion) can execute, stay compliant and profit consistently. I really don’t keep up with the training programs out there but my advice is get the training from someone in the trenches now and actually showing positive results.