Hi Jeff ,
We do not use the exchanges because our experience has not been very positive. All market participants like the idea of an online exchange. However, the practical reality is that a note transaction is quite complicated and has several constituent parts:
1. Who you are buying from? Do they have the collateral in house, who else has bought from them, what is their reputation in the marketplace.
2. What is the purchase process? As you know, there is a lot more to buying a note than agreeing the price. You want to minimize any and all risks in the transaction. First, you agree a price that works for both sides, then you check asset values, then you check O&E, then you check building code violations and any other unrecorded liens and issues, borrower and pay histories, then you check the scanned collateral: does the seller have all the documents you need and can he get you whats missing?
3. What does the Mortgage Sale Agreement say? What protections are afforded to you there?
4. When will you get the physical collateral (and can you inspect it before purchase)? In our last large sale, we provided the buyer access to the physical collateral for all 110 loans under a bailee agreement.
So, by the time we got to closing, the buyer had conducted exhaustive due diligence on:
1. The Assets: He knew precisely what he was buying). To be clear, we were not hiding anything - but he went back to first principles and dug through every fact he could find. He knew as much about our assets as we did. That is the objective.
2. The Borrower: He knew what his likely exit was for each asset based on the personal circumstances of each borrower.
3. The Collateral Documents: He had reviewed every document, completed his own exception report and highlighted any issues
4. Pay Histories: He had completed a full reconciliation from the day of origination to the day the borrower stopped paying all the way through our corporate advances to the present day.
5. BK and FC status: He knew what had happened in the BK's, status of cram downs etc plus a full review of the legal status on the FC action.
The entire process took a full month and he had several people working on the due diligence. We had calls every 2 days to answer questions and provide further information.
It was a long and complicated process. I also think it was about as good a process as we could have had. It was a great way to build a relationship based on trust. We did what we said we would do and it was all completed on time.
There will be trailing documents - there always are. Our buyer should be confident that we will get them to him in a timely manner.
Sorry for the long post. I guess I'm just saying that you need to build a relationship before you can agree a price unless you have someone vouching for your seller.
The exchanges have not found a way to do that yet. I guess that's why the better brokers are still in business. They act as a conduit and hold both parties accountable
Good luck in the notes business. As I always say....take your time, be methodical and make sure you know precisely what you are buying.
