Are you seeing Note Tapes on a regular basis?

Question

With regards to non-performing institutional notes, I get asked weekly by various folks to provide them with my sellers and avenues for obtaining tapes. This obviously stems from a shortage of deal flow within the industry particularly on the lower level.

What I want to say is that obtaining tapes to review is more of a result of doing steps A, B, and C correctly and consistently than an activity. Hence, if you are not seeing credible opportunities on a regular basis, you need to refine your activities, such as identity building, marketing collateral, outreach rituals, peer connections, conference attendance, seller communication, etc. Just my two cents but would love to hear your thoughts.

Andy Mirza · Answer

The idea of creating a note with seller financing to reach more buyers is attractive to a lot of investors. The reality is not so easy and it depends what your goals are. If you want cash, you're better off lowering the price of the property that you're trying to sell to attract buyers. Like others have said, note buyers will want a discount to 1) get an attractive yield of 9-12%, 2) compensate for the perceived risk of a non-institutionally originated note, and 3) compensate for a riskier borrower.

Additional for #2: When you get a loan from a bank, do you remember the endless documents that you signed in an excessive amount of legalese? That's protection for the lender in case they ever get sued by the borrower. In general, the more documents the lender can provide in court, the safer they feel about the paper. This is also done so that the loan qualifies for Fannie and Freddie, or FHA or VA depending on what's being originated. This means that the originator can sell the loan easily on the secondary market.

Yes, it's easy to use a cookie cutter note and record a cookie cutter mortgage or deed of trust. When it's a simple loan where the parties know and trust each other, this is fine, most of the time. If you don't have the big file mentioned from above and you don't have servicing comments and pay histories because you self-service your loan, expect that any note buyers will want a steep discount.

Additional for #3: There's an assumption that your borrower is riskier because they needed seller financing and couldn't qualify for a bank loan. This may not be true but then you need to prove this. Do you have a completed loan application and credit report that you would be required to give to for a bank loan? I believe that the answer is "no" for most seller financing situations. That's part of the appeal to the buyer of seller financing, right? However, less rigorous underwriting process = greater discount that note buyers expect.

If you have a property that's hard to sell, increasing your pool of buyers by providing seller financing can be a great idea if you're willing to keep the paper. This means that you want the income stream and the extra interest. You can require a balloon payment in 3-5 years so you're not tied into the loan forever. But, if you want the cash right away, lower the price on your property instead to increase your pool of buyers.

Chad U. · Answer

Martin we've had this conversation a few times offline and I couldn't agree more.  I find that building credibility in this space by getting your name out there, and close deals with reputable sellers the deals will start coming to you.    The best notes in this business come directly from multi-billion dollar hedge funds and banks, and believe me they are doing their research on you before they decide to offer you a tape of loans.  So create a professional presence, not something like "I Buy Notes, LLC" with an Investor Carrot website and a Gmail address.  I've actually had a few large note funds reach out to me directly looking to offload some of their inventory, for the reasons stated above.

Ken Hobbick · Answer

@Martin Saenz great topic discussion.   I agree that this is a relationship business that takes time to develop a good reputation with sellers and other note investors within the industry.

Note investors are very giving and sharing with information unless it entails their note sources,  which is understandable because everyone completes for the best notes and exclusive contacts.    It also works both ways as the sellers will generally go to established and credible note buyers who can purchase large pools and/or network together.. @Chad Urbshott  just in case you need help with a multi-billion dollar hedge fund purchase down the road.

There seems to be a misconception that this is easy and banks and hedge funds will sell to anyone who asks nicely. As mentioned they will do their own due diligence and research on you.  These notes are tied to people's lives and homes,  who have gone into default for a whole variety of reasons and it makes a difference how you market and brand yourself.  I would rather have a smaller number of quality relationships than to market to the masses,  but its always a balancing act.

Additional factors contributing to this uptick in these request could be perceived lack of quality inventory,  I know I can't help but compare to even a few years back.  I wish I could go back to 2009-10 and buy more houses and notes.....and the additional note investors.

Martin,  its difficult to say how your approached by people and their requests,  but I will admit to asking more experienced investors their advice on sellers and guidance on how to find more reputable sellers,  along with avoiding unscrupulous brokers and toxic asset lists.   But I try and do this professionally and respectfully as they are not obligated to help,  but Im thankful for those that do.

Andy Mirza · Answer

The higher up the food chain you can get, the better deals you have access to. When you trade at that level, you need to understand how the sellers work. This is not like your typical real estate transactions with consumers where deals fall out of escrow all the time. Traders at the hedge fund level do not want to waste their time with people who do not behave professionally. Traders won't tolerate that.

I think this is a big thing that newer note investors that want to buy from the hedge funds do not understand. You won't even get to this point until you've worked hard to establish relationships as mentioned above. When you're trading and you both have agreed on price, you are expected to close the transaction unless something comes up during due diligence that cannot be remedied directly or by a re-price. When your due diligence is completed and you go to contracts, you wire your funds in 24-48 hours. If you blow a trade, there's a high likelihood that that seller will not do business with you again. If you blow it badly, that seller will let anybody else know.

Jay Hinrichs · Answer

@Andy Mirza  @Chris Seveney  I think also its simply a function of the distressed assets finally winding their way through the system.. I look at it from my vantage point of a foreclosure buyer.. they are down 70 to 90% in some markets.

Of course there Is always going to be non performing.. but just not in the quantity that hit us in 07 to a few years ago.

and of course pricing has come way up.. from those cherry picking days..

Bill McCafferty · Answer

@Martin Saenz

I get asked that same question weekly.  I agree 100% with your answer.   People need to put their time in, network and build relationships.

Chris Seveney · Answer

Investors will be looking for a 10-12% yield on the note so you would get crushed Trying to resell it with a 4% interest rate. You would get around 1/2 of the UPB on a resale.

Jay Hinrichs · Answer

and if your the owner and the bene at the same time.. most note buyers would not purchase that.. they would look at it as a cash grab.. along with the HUGE discount you would take. you would need to move this to a 5 year call and move the interest rate up and be true third party.  If its your intention to pull equity out of your properties by creating your own debt that probably wont fly as I stated

Chris Seveney · Answer

@Llewelyn A.

If you create a note it has to be an actual transaction. For example if you have $100,000 in equity you cannot just “create a $50,000 note” without actually paying $50,000 from entity A to entity B.

I hear people do this when they take a property back as an REO and put a lien on the property to protect them against future liens but many are illegal and invalid because there was no actual transfer of funds.

Andy Mirza · Answer

For sure, the volume of foreclosures is down but I wonder how much stuff (residential NPNs) is still out there. From my perspective, it seems like our sellers are in no big hurry to foreclose. It appears that the big banks have shut down the excess capacity that they engaged to process the extreme volume of the foreclosures they once had. Most of the easier foreclosures have already occurred. I'm talking about the borrowers that don't fight or resist their foreclosure.

Most of the product I've been looking at lately has more hair on it. The borrowers are contesting the foreclosure, have gone through multiple loan modifications and failed them, or have filed multiple BK's, which are things that drag out the timelines even longer for the big entities that process the foreclosures. Most of these loans are crisis era vintage (2002-2008). I wonder how much is actually out there on the Fed's balance sheet or with HUD or others and how long it will actually take to take care of all of it. Jay, even if we're talking about 10% of NPN's left from the financial crisis, how much is that? $1 Trillion, $100 Billion, $10 Billion? That's still a huge amount of loans.....

Are you seeing Note Tapes on a regular basis?

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