10 Tips to Starting an Off-Market Distressed Real Estate/Notes Business

For those of you who want to build wealth with distressed assets AND you have the time to take it on, here are my insider secrets on how to get started that you can leverage from my time and experience in this business.

1.     Mind Set: Anyone in the distressed assets business must remember they are providing a service to sellers of notes. For whatever reason, they have built acquired or built a portfolio of non-performing loans that they need to sell. Picture yourself as a solution provider willing and able to liquidate assets they can no longer hold onto. Too many note buyers approach sellers almost apologetically as if the seller is doing them a favor by selling to them. The reality is quite the opposite. Remember, he who has the cash rules.

2.     Look for Motivated Sellers: As in any real estate purchase, if the seller is not motivated, move on. Come back later if necessary when they are getting tired of holding the asset. Learn what a motivated seller sounds like. If you listen well, you will learn to identify key words, behaviors, and emotional tones. As you get better at identifying these marks of motivation, you will learn to spend time on those that are ready to sell instead of those who are still proud of what they hold. You can find those who will be more likely to be motivated by using Scottsman Guide and FDIC to find banks that have more than 3% of non-performing assets. Then when you call, you know they need help. You may have to gently remind them though! As for the special asset manager or chief credit officer in charge of non-performing assets (or REOs if that is what you

want).

3.     Eliminate Time Wasters: Although there are certainly those who connect buyers and sellers who provide a service, there exist many “brokers” who will use up your precious time with little more than spinning you around and making you dizzy. Adding on layers of contacts between buyers and sellers places transactions in jeopardy of failure for the cumbersome ability to communicate between principals. One day you receive a tape (list of assets) that is as long as an ancient scroll with obvious signs of being aggregated from disparate sources and you have been the hapless recipient of a “broker tape.” No, the assets cannot be verified as truly available. No, you don’t know who is the real seller. The broker does not know the history of the assets. Even so, he may claim to be the actual seller. Hmm. Dubious claims like this kill transactions and waste your time.

4.     Contact Real Sellers: When you are getting started in this business, it is very tempting to let others bring you assets to buy instead of searching them out yourself. If you are too passive, and you do not yet have sufficient established connections with sellers, you will be at the mercy of those who find you. Instead, actively call banks, hedge funds, attorneys, trustees, and bankruptcy attorneys to find assets to buy. An initial contact via phone works best and then a “drip campaign” using short email messages works well. This establishes the personal connection first, which is so important in this business, and then reminds the seller you are still out there buying when they are ready to sell. Being in the right place at the right time is the key. And staying in touch keeps you “top of mind” for the seller. Remember, you are providing an easy disposition channel for sellers. Making real contacts and then staying in touch is the key.

5.     Build a Contact List: As you build your contact list of potential sellers, build a database so you can remember the history of the contact including dates you have spoken and the nature of the conversation. Note hobbies and interests of the seller when possible so you can be  personal in your approach. What football team does he follow? What are his hobbies? We live in an increasingly impersonal world and people crave personal attention. If a seller thinks they are just someone on your email list, they will forget who you are. Use a contact management system to keep all your contacts straight. Divide contacts into those who have an established relationship with, and those whom you are still trying to contact so you can customize your emails to each group.

6.     Create Win-Win Relationships: When you buy distressed assets from a seller looking for liquidity, you are providing a win-win service. Use this same approach with joint venture partners and note buyers. Become known as a person of your word and worthy of trust. If people know you are looking out for their interests as well, they will reward you with loyalty and come back repeatedly as a seller, buyer, or private lender.

7.     Phase Your Due Diligence: Because the volume of distressed assets has swelled to record levels, it is more important than ever to have a plan for due diligence that saves time. Follow these steps:
a.      When you first get a tape of assets, eliminate those assets based on the geographic areas you do not buy in.
b.     Second, do a general check on pricing levels. Is the seller being realistic overall? If not, move on.
c.      Third, use google “street view” to see what the property looks like if possible. Eliminate those assets that do not meet your quality standard or exit strategy.
d.     Make an “indicative bid” with a “Letter of Intent” to see if the assets are still available and if the seller is willing to accept your pricing. Include a clause giving you at least one week to eliminate assets based on your due diligence.
e.      If accepted, ask for loan files if available and now dig deeper into whether the assets are worth buying. Research comparative properties and demographic data just like you would for buying real estate. Some helpful websites are CLRSearch.com for crime reports and GreatSchools.org for school ratings per zip code.
f.       Toss out those assets that do not meet your objectives and expectations and submit your final purchase agreement. Ask for at least one week to fund. More if possible. If buying from a bank, you have more time, usually 3 weeks. Hedge funds often move faster, especially if they provide more due diligence data for you.

8.     Balance Cash Influx, Cash Flow, and Long Term Wealth: Remember the disco song of the 70’s by the Bee Gees “Stayin’ Alive?” Every business person must stay alive by having cash flow to pay this month’s bills. Cash influx is money that comes in chunks. When we sell an asset after a short hold, though we may not have known exactly when this cash influx would come, it comes when the deal finally closes. Cash flow, on the other hand, occurs when we have an asset that pays us monthly. Rental property and loans modified with borrowers who send us monthly money fit into this category. This is the most consistent income that pays the monthly bills that we can count on. Many people fail when their cash flow sources cannot sustain them while they wait for cash influx paydays or long term wealth. Speaking of long term wealth, this is the equity through asset accumulation and appreciation that translates into to one’s net worth. Though we cannot spend our Long Term Wealth for current needs, the importance of it in creating financial security is paramount. One never knows when time, health, or motivation will run out and one must cash in ones’ life winnings. Properties that have appreciated over time are a great hedge against inflation and holding vehicle for long term wealth. Well invested stocks that rise in value over time are another example. Every smart investor would be wise to plan their schedule and income streams with these three categories in mind. Money for the short term, intermediate term, and long term keep meet our present and future lifestyle needs. Wouldn’t you like to be able to throttle back your work hours in the future? Balance out these three and you can.

9.     Build a Team: Have you learned to exchange your competitive nature for the more profitable path of collaboration? At the heart of a successful business is the ability to share with openness among those we trust about the successes and setbacks we experience. Being open about what we know opens us to receiving what others can teach us as well. Those who openly share what is working in their business will find joint venture partners and customers. Building a successful team is as much about being willing to collaborate and share as it is about finding the right people. Those who are in constant fear that others will “steal their idea” guard what they know so closely that they cannot form new alliances and benefit from what others know. Unless we are willing to share what we know, others will not open up to us as well.

10. Build Policies, Procedures, and Systems: Most people have read Michael Gerber’s book “E-Myth” about the importance of moving from “technician” to “manager” status in a business. As CEO, every time we master a process, we are wise to document each step so we can delegate it. Some CEOs are turning this on its head by celebrating the value of their “super employees” who very capably take a general objective and develop steps to accomplish it and then document this for the CEO. If you are fortunate enough to have this kind of employee, then even the development of a process becomes more a function of “who” you hire, than “what” you spell out that they do, i.e. versatile and skilled employees can even help develop the procedure and systems they follow. By not limiting the development of systems to what the CEO has time to document, we are able to scale even faster and engender employee involvement as well.  Any employee who does this for the company adds value, generates new money for the company, and deserves both recognition and commensurate remuneration.

Conclusion
These steps can catapult a distressed assets business whether you are interested in property, notes, or both. If you have not gotten involved in distressed assets yet, and want to know more about why this is the best time to generate short and long term wealth in this way, visit our websites, RealEstateNoteInvestor.com and SmartMoneyVision.com
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Brian Netzel has been a real estate and note investor since 1982 when he bought his first rental property on his public school teacher salary. He is now focusing on turn-around projects using distressed assets nationwide. He is the acquisition manager for the private equity firm Inspired Capital Partners and the founder of SmartMoneyVision.com and RealEstateNoteInvestor.com which train investors to apply smart strategies that work in today’s real estate market.