Why would someone sell a "perfectly good" seasoned performing note for 60-65 cents on the dollar?

[Julian Buick]

I posed this question on a recent forum post and got this response:

To address your question we have to pause on the idea that you implied of "perfectly good".

Is perfectly good the simple notion of payment history?
Is past performance indicative of future results? (credit)
If performance fails can the remedies be enforced? (compliance)
If the remedies can be enforced is the collateral sufficient to support recovery? (equity/discount)

Great response btw, but my question now is, is this really possible in today's market/climate to buy a seasoned performing note (with equity) for 60-65 cents on the dollar?

From what I've seen it's closer to 90 cents on the dollar. Clearly I'm not looking in the right places.

[Dion DePaoli]

I think it is important not to back your expectation into a corner.  A note, is a note, is a note.  That is not meant to mean there is no variety amongst all the notes in the universe. It is rather meant to help you realize two notes with similar characteristics including the important ideas of risk and return are in fact fundamentally the same 'type' of investment.   If two investments are similar in characteristics than it matters not where you found it or who the seller is any further than a function of price difference.  

What I am attempting to point out is that it seems there is a stigma of sorts that there is a secret place to find "the good notes" to buy.  That is a misconception.  Whether you find a note on an exchange or from a referral of a professional or the courthouse or broker or neighbor - a note, is a note, is a note.  You can buy a red apple from the grocery or the orchard - they are both red apples.  

The note or loan file itself is what is better or worse not the medium by which you found it or purchased it.  I think sometimes when newer folks read or hear responses like Bill's they confuse this a little bit.  It is safe to assume that Bill is extremely comfortable looking at a note from anywhere or anyone.  (sorry Bill you are the character in my story)  The key is his knowledge and comfort in assigning a value on the asset.  Skills developed over time and deal volume.  

Is a note from a private origination different from an institutional origination?  Yes, of course.  We would expect a great level of competency from the institution for regulatory and underwriting ideas.  That however does not mean a private origination always lacks the same level of competency.  

I often get a sense that this stigma of where or who I got the note from is a default defense to a lacking of the skills and knowledge to place a value on said note.  I find it to be an exercise in "who cares".  That is not really what you should be focusing on, focus on the risk and return derived from the characteristics.    

Secondly in line with the thread topic originally is another sort of stigma that goes with pricing.  I think there is a tendency for newer folks to look for the shortcut answer and by doing so miss the real answer.  The value of the note is what is assigned in relation to the recovery of the principal and the interest paid considering the risk of both.  I get a sense that when Bill mentioned 60% to 65% folks pulled out a notepad and wrote that down as a key point, circled it five times and said "got it".  "All performing notes trade for 65%."  Obviously that is simply not true.  It is true however that notes can trade between 1% to 110% of the balance.  

Loans that trade for 65% of the balance do so because of the risk and return dynamics.  Now also bare in mind the market which loans trade in, the secondary, is a fluid and open and active market.  There is competition and not all competitors value the risk and return at the same level.  Investor A desires a 10% return and Investor B desires 8%.  Investor B's offer will be higher than Investor A with an important caveat.  The investor's skill and capacity to realize that return.  If Investor A has a better program or understanding on how to realize that return he may be able to offer a higher price than Investor B while still achieving his higher return.  The case and point there, again using Bill's earlier statements, he looks at the note, knows he can refinance it in X amount of time.  His offer blows Investor B's offer out of the water.  

It is understandable that these nuances in the way many newer note investing discussions proceed are fairly linear in nature.  It is a function of gaining an understanding.  That said, it is merely one lesson in the class not the whole class in and of itself.  As soon as we get any type of discount to the principal, where we stand to collect all of the principal, time drastically affects the return.  If Investor A can do it faster than Investor B, Investor A will produce a better offer or present a more favorable value to the Seller.  

Further, the casual conversation of pricing is not to ever mean that all pricing is the same. This happens across the board in these discussions from PN's to NPN's. Folks hear they can purchase NPN's for 30 cents on the dollar and then presume all NPN's are worth 30 cents on the dollar. That is an absurd over simplification. The error falls onto the listener not the statement maker. Like in Bill's statement find a private loan and buy it for 65% or in the above find an NPN for 30%. The seasoned note investor knows and understands the point is a talking point and not a rule. It is not a rule because the characteristics of loans differs greatly. A loan with an LTV of 200% will have a much greater discount than a loan with an LTV of 10%. Simply stated a loan at 10% LTV carries very minimal risk of loss of principal or lack of realizing the intended return.

The greater point here is, when these discussions take place do not hunt for rules.  Hunt for the ideas that create that train of thought.  Teaching a new note investor how to invest in notes is teaching them how to think about notes not what items are on a checklist.