Increased divide between entry level note players and mid-level?

Question

Yesterday, I started my day by speaking with a very successful 
mid-level note player. Our topic of discussion focused on current deals 
in the marketplace. Later in my day I spoke to a few borrowers regarding
 loan modifications and finally, I ended my day speaking to a newer 
player who expressed inventory is poor and everything is overpriced.

It got me thinking…is there an increasing divide between the mid-level 
playing field and the bottom feeders (said with love) or is the entry level player I spoke with making excuses?

Throughout the year I have been inundated with opportunities and take 
downs…it’s been my best year!  Perhaps I don’t focus on the macro 
picture since I am too busy building my own micro picture.  With that 
said, I do believe there is more of a challenge now for someone new 
coming into the space than a few years ago.  There is no doubt less 
VISIBLE inventory hanging at low levels.  However, VISIBLE is the key 
word.  It is important to set up systems for sourcing and work them 
diligently.  That way, you see and find what 
others are not, while separating yourself from the herd.  Just my two 
cents but would love to get feedback.

Tim S. · Answer

I think you have to go "all-in" if you want to be in notes. New investors either need to JV with people who are making a legitimate business out of it. Or they need to devote enough time to make a business out of it themselves.

I don't think you can get into the note biz half-way, you need enough deal flow to get "good" deals that can make a profit. That's different than just investing in notes, you can be a passive investor part time. If you want to start a note business, where you are investing other people's money, you need to be all-in, and devote a good chunk of time to it.

Low dollar notes, generally mean higher risk.  Sure you don't have as much money at stake, but they are cheap for a reason. Bad property, bad area, documentation problems, liens, taxes owed, unresponsive borrower.  Harder to get your money out of a note like that, it can be done, but it's higher risk.  If you go into just as a learning opportunity that's fine, but know what you're getting into.   It's the best way to learn, actually do it (after educating yourself).

Tim S. · Answer

i think it’s a lot easier for you guys who are known in the industry to find notes. Especially if you are buying in bulk. I found it difficult to buy just one or two. Sellers understandably like to deal with known buyers. Noobs are probably going to have to pay more, because they are not known to the sellers, adds more risk for the seller. And buying in small quantities you’ll have to pay more.

There are lots of CFDs available, but I don’t like them, usually crap houses in bad areas. This can work if you are dealing in volumes, a few bad deals can be made up for if you have lots of other deals. But if you are just buying one or 2, a bad deal is a killer

Fred Moskowitz · Answer

Great post @Martin Saenz and I completely agree with your points in this thread.  Deal sourcing absolutely requires significant investment of effort, with consistent work over an extended period of time. Setting up good systems and habits will go a long way to being successful. Keep pushing forward!!

Mike Hartzog · Answer

Yeah even when you know this and work hard to avoid it you can still end up with properties that are extremely damaged on the interior.  I’ve never been favorably surprised by the condition of a property I have foreclosed on.

Martin Saenz · Answer

The beauty is you know that a lot will be junk going into it.  I'm sure you have gotten very quick as spotting the rough ones and vetting tapes in general.  Perhaps your next step will be to hire an assistant and train them so you can focus on sourcing more opportunities.  That is what I've done this year and it's one of the best moves I've made.  I hold you and what you do in high regard my friend

Martin Saenz · Answer

Funny...we all have our horror stories. My first 10 notes where 1st NPNs on junk properties in OH. I paid dearly. One had a 7' diameter hole in the living room, one was a vacant home in the middle of no where, one was next to a war zone in Cleveland, one had feces and other waste inside etc etc. I barely got out from under that first buy. Learned early on to buy notes backed by decent properties. Junior lien buying helps me keep that focus

Andy Mirza · Answer

I completely agree with @Tim Simmons. Go all in or invest passively with the guys that are full time when investing in institutional NPNs. If you are truly dedicated and motivated to do the business and are willing to do what it takes, you are excepted. But most most people like the idea of the note business, get their feet a little bit wet, hopefully don't get burnt, and move on to something else. This is a volume and spread the risk business.

I haven't been in the business that long but benefit from having a partnership where sourcing products is not a problem. We finished raising capital for our latest fund at the end of last month. Two sellers showed us two exclusive tapes with over 150 loans with UPB north of $35 M. Not all fit our criteria but there's way more good product than we can buy. The reality is that the experienced guys have a big head start on the newbies. Either have the fortitude to do what it takes to get to this level or focus on a niche outside of the institutional NPN market. It's not easy to get here.

Gil Ganz · Answer

Great topic Martin. I can relate to what you say about sourcing. There was a period when the amount of inventory I got was so low, my head was spinning from thinking how do I get more sources. I thought to myself where is all the inventory? But I started making that extra effort getting to sources, and I'm starting to see the fruits of that hard work. There is that reputation thing, as mentioned by Chad, the more deals you close with sellers the more reputation you have, and they start reaching you (I can see that myself in the last month), but I think with enough determination, hard work, and a little bit of out of the box thinking, one can overcome that obstacle.

Chad U. · Answer

Martin I wholeheartedly agree.  It seems the longer you are in this business and establish a reputation, oftentimes the deals find you. Sellers will start reaching out to you when they have "off-market" deals that they aren't advertising to the general public. I can barely keep up on bidding these days, getting 1-2 tapes per week. Mind you, a LOT of this is garbage backed by junk properties as mentioned above, but there are still a few needles in the haystack.

Matt Skog · Answer

@Martin Saenz,

It all depends on what type of note ultimately. I think many newer investors are busy swarming into the NPN field, instead of learning to JV on performing notes.

New investors need to know how each asset type works, and it should be made more clearly to them that NPN investing is an advanced strategy for those who are more experienced.

Increased divide between entry level note players and mid-level?

Most Popular Reply