How to Buy Notes…Knowing Your Seller
Most of you have heard of Sun Tzus. He is a well-known Chinese warrior and his main instructions to his soldiers before going into battle was know your enemy.
This same concept applies to note buying.
Know your seller should be the mantra for every note buyer (and broker for that matter!).
Why?
Because if you dont know your seller then you might be entering a negotiation with them without having any thought of their key negotiating points.
A How to Buy Notes Example,My Recent Bid
A bank has the mortgage on a house in Salt Lake City and they want to sell the 1st.
The note had matured over 2 months ago and the borrower hasn’t paid on the note in over 120 days. Technically the loan could be called due.
No foreclosure notice has been served by the bank.
And they’ve called you in order to find out if you want to buy their non-performing note and mortgage.
The first thing to look for is price, what should I offer? Helpful documents are the title report and BPO. Also, contacting a local realtor for comps.
And we place in our bid.
The rep from the bank advised me that approval from a committee of senior staff would be required.
When I questioned her where she needed pricing to be and the situation of the borrower, she was very hesitant to give me answers.
Her behavior was suspicious to me so I chose to probe for more information. When I did, she clammed up and would not discuss anything further with me.
Obviously something was very incorrect with this note buying deal.
It was odd that the bank rep would react that way – in fact it was the first time Id seen that kind of a response to an individual loan before.
How to Buy Notes – Tips when Talking to the Banker
I chose try a small exploratory language with her and called her back.
Would it be safe to say that the bank has a unique relationship with this borrower? I questioned her?
That is absolutely right, she answered.
It grabbed my curiosity as I wonderered what was going on with this defaulted mortgage.
So I kept fishing, understanding full well that she couldnt reveal any information to me, but that she wasnt opposed to my pressing for more information as long as she could answer in yes or no terms.
Is there a reason why the bank hasn’t foreclosed yet?
Yes, she answered simply.
I know you can’t tell me, but I am assuming that this is a hard relationship for the bank to foreclose on. Am I right?
Absolutely, she answered again. I cant tell you any more than that.
I have one more question. Would the bank be more open to selling this nonperforming note if they new what exit strategy I would be pursuing? Rather than bassed on price?
Yes, she answered briefly again. That would be right.
What is happening with this note deal?
After a couple more phone calls, I was able to piece together some information. The borrower was a woman who was well connected in the Salt Lake City political cirlces. Her ex-husband happened to be a close friend of the banks President.
If the bank foreclosed on her, they might find themselves in a political nightmare. And that is why they wanted to sell the nonperforming loan to a 3rd party investor.
The lesson you should take from this How to Buy Notes example
If you dont take the time to probe WHY the seller is looking to sell a loan, and the circumstances around the sale, you may completely miss the sellers key negotiating points on a transaction.
This deal wasn’t about the price. The key focus for the seller was finding out how we would work out the note with the borrower. Price wasn’t really an issue to them.
Your How to Buy Notes Action Items
1. Always try to know WHY a bank wants to sell you a note or a pool of notes.
2. Find out what the negotiating points are. Why are they selling you this defaulted mortgage? The answer is usually one of the following:
a. Price
b. The amount of time it will take you to close
c. Can you close a deal? (the bank cares more about the fact that you can close rather than the price you are offering for the discounted note)
d. Your note buying exit strategies
So the next time you are taking to a bank about buying notes, remember these key points.
Itll make you that much better a note buying warrior!