State of the Union for 2018

[Account Closed]

Those that have been doing this a while, how do you feel about the current environment? There’s a flood of new people (including me) coming into the market and from talking to people in this for a while and reading, seems like there is less inventory and more people chasing it. Those that have been doing it have established relationships. My previous business I was good even though companies were shutting their doors left and right as I had good customers and provided quality service and we weren’t the cheapest by far. We didn’t compete on price we competed on service. So coming into the notes, I’m just another name. Obviously every business has its cycle, I’m wondering were the vets see this industry heading? Nobody is obviously can see the future, but just throwing it out there none the less. Thank you

[Dave Van Horn]

@Account Closed

Your perception of the current marketplace is correct in my opinion. You've entered the space at the time of an upmarket that may be here to stay for awhile. My company and I entered the space in an upmarket as well; the only difference being it was really just a matter of months before one of the biggest economic crashes ever. Fortunately we were able to build and eventually thrive as a 2nd lien business in a down market because of that. The irony is, we've now grown enough in that time since the pendulum has swung the other way, we've bought more 1st and 2nd lien product this year than the last few years combined. The rub to the retail institutional note buyer is, we've also sold less than ever.

What you're describing when you talk about what you see right now, is really just a factor of the marketplace. And I also see that being much of the same for the retail note buyer throughout 2018 and possibly even further. I think on the institutional side, there's not much advantage to sell to the retail buyer for a variety of reasons. For example, many institutional funds can make more money either holding notes that are appreciating in value or selling notes in bulk to another bank where they can get things like NSO credits. It's not only about the money, but the risk as well with compliance being what it is.

Now I say all this but to Jay's point above, the note space is VAST and the market isn't everything, there are ways around it. I've told this story before and I'll probably tell it again but around the time of the crash I had a friend who didn't know what to do. He was nearly broke. His then-current business model of Buy and Hold was no longer working. He just couldn't get financing. So instead of remaining despondent, he decided to take a banker to lunch. What he was really doing wasn't "Hey, I have _____, will you lend me money on it?" He took the approach of asking, "What is it you're looking for? What is your bank or other banks you know, lending on?" The banker's answer at that time, was student housing. So my friend goes "Okay" and he began to adapt. He started by pounding the pavement for student housing deals, reaching out to his network, and building his team. Pretty soon he was raising private money for student housing rentals and finding the remainder of traditional financing needed pretty easy. That was 10 years ago. He now owns over $100 million in student and commercial Real Estate, and makes a pretty penny in his salary raising capital as well.

My point of the story is this: It's not about what "we" want as note investors. It's about discovering "what the market has to offer" and being able to adapt to it.

People often ask me "why aren't you selling as many notes today?" And my new favorite reply is "Where were you 5 years ago? We sold everything we had!" If you're going to buy in 2018 like you would in 2013, you're going to struggle to get product with higher prices, higher demand, and lower supply. Of course there will always be some sort of institutional product out there, it’s just a matter of how much and when. The good news is, there's a million ways to do the note business. Be it hard money lending, P2P lending, even seller financed notes seems to be coming back now that there's equity in the marketplace. Just like hard Real Estate, the possibilities are limitless and I see 2018 being a big year for many people in the note space.