Beginning NoteBuying

[Theresa Davidson]

Hello experienced investors...I have been reading threads and have a 101 knowledge of notebuying from other short teachings but still need a great teacher. I want to buy non-performing notes from smaller banks on SFR, 1st lien positions and either renegotiate the note for the homeowner, or obtain a DIL to sell to an end buyer.

My 1st question is: In negotiating from the bank, what is the best offer structure so that you get them interested and find success? What if I want to buy the note at 50% FMV of the home? Is there a certain quantity of notes to buy to be able to offer this figure or is that an unreasonable percentage to even go for?

Also, is it ever successful if you have a homeowner with an underwater home/lis pendens who would want you to buy the note from the bank and it just being one note, they agree to sell to you at a discount? thank you for all insight.

[Dave Van Horn]

Hi Theresa Davidson ,

I saw your post here on the forums and as someone who runs a fund that buys/sells residential 1sts and 2nds I think I can shed some light on your questions. But before I start I would like to mention, like Bill said, the idea of buying an individual non-performing note directly from the bank is an unlikely scenario, unless you have a lot of capital to buy in bulk. Now the reason it's unlikely is because it's hard to buy just 1 note from the Trade Desk of a bank whose job is to specifically sell pools of notes. And to your point of working through a distressed borrower to obtain their note, again it’s an unlikely scenario. Even if you found a borrower willing to do that with you, it's incredibly difficult to buy a loan from the bank through Loss Mitigation – which is the department you would end up at working through a delinquent borrower. Their department isn’t designed to sell notes; you would have much better luck doing a short sale in that scenario. Banks generally prefer to sell notes to other banks and servicing companies who specialize in delinquent debt. The good news is you CAN buy directly from one of these servicers like Granite Mortgage Solutions, Gemini Group, Kondaur Capital, etc. These are just a few examples but they all sell exactly what I think you’re looking for on a loan level basis.

In regards to your question concerning FMV percentages and purchase prices, I have to say first and foremost there's an exception to every rule and this is a business of exceptions but normally how it works is a trade desk pushes out a tape of assets and you would bid on the quality of the tape. In CURRENT MARKET CONDITIONS when banks deal with servicing companies or large quantity buyers most 1sts are trading anywhere from 45 to 65 cents, but typically that means quality 1sts for about $150K and above (depending on equity), which is what the big servicers like to buy. Most assets today are trading at a percentage of BPO (Broker Price Opinion) as opposed to UPB (Unpaid Principal Balance) because of the loss of equity in the marketplace. Assets under $150K banks tend to discount more, and if you go for assets below $75K they start to discount even further due to the diminishing quality of the collateral. There are a lot of factors going into this type of bidding BUT when you buy from a servicer like I mentioned above you don't always have to bid on large tapes and you can buy individual quality loans in your local geographic area.

With all of that in mind I personally DO think it’s possible to start out buying non-performing notes. I started out originating private 1st mortgages and of course they're all performing, but even those can go non-performing because let's face it bad things happen to good people. And whether we want to believe it or not, something bad could happen on any kind of note you own (in our business we call them the Big 4: death, divorce, job-loss, and illness). That made me decide that I wanted to learn how to work non-performing notes to insure no matter what happened to the notes I owned, I'd be able to handle it even if I was wiped on a lien.

I learned much of what I know from a Manhattan hedge fund manager who taught me the collections/workout side of asset management, as well as folks like Dean Engle (who unfortunately doesn’t teach today). I've also taken a few seller financing and private money courses as well over the years, but most of what I learned was from experience because it's absolutely a learn by doing business. At some point, we all have to take the plunge, whether it's buying your first property or even if you want to be a brain surgeon you first have to operate on a cadaver or something! LOL

If you want more info on getting started in the note business, feel free to message me. Hope my comment helped.

Best,
Dave