Performing and Non- Performing Notes

[Sterling Hall]

Has anybody on BP had any luck with transferring from flipping houses to flipping and holding notes. Seems like the next step for me since shorts sales and REO has dried up. Any opinions on this subject would be appreciated.

[Paul Birkett]

Sterling,

I echo what Bill is recommending. I switched to notes 2 years ago and Im delighted that I did - its the most exciting opportunity in the finance space right now (in my opinion). The transition was not easy, this is not an easy business and there is no way to make it easy. It takes study, practice, determination and attention to detail.

The fundamental mistake I made was to think that my experience in rental homes/flipping gave me some insight into the note business. That was dead wrong! As Bill says - notes is finance, homes are collateral. Your bank manager doesn't know how to buy, fix and sell a flip....and you don't yet know how to originate, underwrite and sell a loan. Whether you are buying performing loans, non-performing, first or second liens - you will need to know quite a lot about the banking business.

The good news is that it can be learned - but before you start the journey have a think about the questions I asked myself before I began:

1. What am I trying to achieve? Do I want a new sideline to replace my buy-and-hold rentals or am I trying to build a new business that was scalable? In my case, I wanted to build a business that could scale. I had about 40 rental homes at the time, they were taking up too much time and the work wasn't very interesting. I knew I wanted to sell the SFH's and do more multifamily or something that was scalable. What are you trying to achieve? Not with notes...but in general. Maybe notes is the answer, maybe its not.

In my case I had a long corporate career and had learned the skills necessary to run a large organization. The question for me was: what type of an organization and in what industry?

2. How much time and effort am I prepared to dedicate to this? I massively underestimated how much learning there is to do in the note space. I took a class, hired a coach and then bought some notes with a JV partner. In hindsight, that was a totally unrealistic approach: the class was good, the coach was excellent and the JV partner was highly experienced. The problem was simple: you can't learn the business in 12 weeks. To gain expertise requires at least a year of dedicated work - working all day every day to learn and experience the business. I say "experience" because knowing the facts is not enough, you need real-life experience. This business is highly systematic. You need a system for every single task from valuing the loan all the way through the hundreds of steps that you may need to take before you sell it, foreclose on it, or write it off. It takes a lot of time and effort.

3. Can I do this alone - do I have all the skills necessary to succeed? I was trying to build a business that could scale...a business almost like a bank. We could scale up over time and eventually own a lot of loans. My corporate career had equipped me for some tasks like setting the direction, managing teams, raising the capital and a lot of the operational elements of running a growing business. I didn't know much about the systems we would need or the actual mechanics of running a loan book. So, I found team members who were expert in those fields. That took a lot of time. 

4. What is my role going to be? Should I do this myself of should I join someone else's team? In the end I couldn't find a team to join so I built my own.  We are now a team of 7 and we are scaling the business.

It could be that you don't yet know enough about the space to answer these questions. If that's the case, I would go to a note conference and maybe even take a bootcamp. Like Bill I don't recommend guru's - but ~$500 for a 2-3 day intensive workshop is money well spent in my opinion. It will be like drinking from a firehose but you will get a feel for the industry in a short period of time. I would also read everything you can find on BP. There is a lot of info here and on youtube and other places too.

good luck with your transition to the note space.