How to Buy Notes…Know Your Seller
Sun Tzus is a famed Chinese warrior and everytime before going into battle he would instruct his soldiers to know their enemy.
Well the same is true with note buying.
Every note buyer and brokers should use “know your seller” as their mantra.
Why is this?
Not knowing your seller will place you in a position where you will be entering a negotiation with no idea of what your negotiating tactics will be.
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.
The foreclosure notice has not been served to the borrower by the bank.
They want to know if you would be interested in buying their non performing note.
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.
Then I submitted by bid.
The rep from the bank advised me that approval from a committee of senior staff would be required.
But she was very cagey about answering any of my questions about where she needed pricing to be in order to sell, and what the status of the borrower was.
Her behavior was suspicious to me so I decided to probe for more information. When I did, she clammed up and would not discuss anything further with me.
Obviously something was very wrong 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 decided try a little exploratory language with her and called her back.
I am assuming that your bank has a unique relationship with the borrower, is this safe to say?
That is absolutely true, she replied.
It grabbed my curiosity as I wonderered what was going on with this defaulted mortgage.
I was aware that she wouldn’t reveal any information to me other than yes and no answers, but I kept probing.
And theres a reason why the bank isn’t foreclosing in this case, correct? I asked.
Yes, she answered simply.
If the bank forecloses it would put them in a difficult situation, right?
Absolutely, she answered again. I cant tell you any more than that.
I have one last question. Is it safe to assume that the bank is more concerned with the exit strategy rather than price in selling this nonperforming note?
Yes, that is correct.
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.
They could find themselves in political mayhem if the bank foreclosed on this woman. To get around it, they decided that a note sale to a 3rd party investor would be easier. That way they would be rid of the nonperforming loan.
How to Buy Notes – The Lesson Learned
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 From This:
1. Try to understand why the bank is selling their 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. Pricing
b. Speed with which you can close
c. Your ability to close (in other words, the bank cares more about whether you can close rather than what price they Buyer is offering for the discounted note)
d. Note buying exit strategies (certain banks prefer investors that only foreclose once they’ve exhausted other options)
So keep all this in mind when youre next talking to a bank to buy notes.
It will make you a much better note warrior!
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