How to Buy Notes…Know Your Seller
You’ve probably heard of Sun Tzu’s (the famed Chinese warrior) instruction to his soldiers to “know your enemy” before going into battle.
Well the same is true with note buying.
“Know your seller” should be the mantra for every note buyer (and broker for that matter!).
Because if you don’t “know” your seller then you might be entering a negotiation with them without having any idea of their key negotiating points.
A How to Buy Notes Example, My Recent Bid
A bank has a 1st mortgage on a single family home in Salt Lake City that they want to sell.
The borrower hasn’t paid on the note in over 120 days, and the note matured over 2 months ago, so the whole loan could be called due.
The bank hasn’t served the borrower with a foreclosure notice.
And they’ve called you in order to find out if you want to buy their non-performing note and mortgage.
I looked at this loan first from the standpoint of price – how much could I offer for it.
We pulled a title report and a BPO and looked at comps that a local realtor provided to us.
And we put in our bid.
My rep at the bank hinted that she would need approval from a committee of senior staff at the bank.
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.
I became a little suspicious and tried probing for more information, but she immediately clammed up and said: “I’m not at liberty to say more about our borrower.” Something was up in this note buying deal.
It was odd that the bank rep would react that way – in fact it was the first time I’d seen that kind of a response to an individual loan before.
How to Buy Notes – Tips when Talking to the Banker
So I called her back again, and tried a little exploratory language with her.
“Would it be safe to say that the bank has a unique relationship with this borrower?” I asked her?
“Absolutely,” she immediately replied.
I was curious – what was going on here in this defaulted mortgage deal?!
So I kept fishing, understanding full well that she couldn’t reveal any information to me, but that she
wasn’t opposed to my pressing for more information as long as she could answer in yes or no terms.
“And there’s a reason why the bank isn’t foreclosing in this case, correct?” I asked.
“Yes,” she answered simply.
“And you’re probably not at liberty to tell me, but this sounds like it’s a difficult relationship for the
bank to foreclose on, is that correct?”
“Absolutely,” she answered again. “I can’t tell you any more than that.”
“One last question,” I asked. “Is it safe to assume that the bank may be more open to a bid on this loan
that clarifies what exit strategy we’ll be pursuing with the borrower rather than an actual purchase price
for the nonperforming note?”
“Yes,” she answered briefly again. “That would be correct.”
So what was going on in this note deal?
Well, what I learned in two more phone calls with the woman I was negotiating with at the Bank was that the borrower was extremely well connected in Salt Lake City political circles, and her ex-husband was a close friend of the bank’s President.
Foreclosing on her could create a political ruckus for the bank, it turned out. So the bank was exploring discreet options to rid itself of its non-performing loan – namely via a note sale to a 3rd party investor.
The lesson you should take from this How to Buy Notes example
If you don’t 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 seller’s key negotiating points on a transaction.
In this case, it wasn’t price. It was what we were planning on doing to work out the note with the borrower. Price was much less of an issue.
Your How to Buy Notes Action Items From This:
1) Always try to understand WHY a bank wants to sell you a note or a pool of notes.
2) Try to find out what the key negotiating points are for the bank for selling you this defaulted
mortgage. Usually it’s one or more of the following:
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 price they Buyer is offering for the discounted note)
d. Your note buying exit strategies (in other words, the bank may determine whether to accept a bid or not based on what kind of buyer you are – are you a foreclosure operation with no attempt an modifications, for example?)
So keep all this in mind when you’re next talking to a bank to buy notes.
It’ll make you that much better a note buying warrior!