What’s your go-to process for note due diligence?
I’ve been digging more into the note space lately, and one thing that stands out is how different due diligence looks compared to rentals or flips.
Curious what others here prioritize when reviewing a note. Is it more about the borrower’s pay history, the property value, or the legal side of things like title and collateral docs?
Would love to hear how seasoned note investors here approach it.
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When I left banking after the last crash, we started by buying non-performing commercial loans out of banks. That being said, I had 15 years of special assets and lending background in commercial banks under my belt, so the DD part was something we had down. Then, when "notes" started getting more popular with novice investors, I attended a few conferences and saw gurus speaking that had ZERO formal credit background charging to teach people how to buy loans. It was flippin' scary. Regarding modeling, we created our own proprietary modeling system based on our experience in bank collections and special assets. We "back into" the "strike price"...the price we're willing to pay for a loan where we start with the ARV, then back off time-value of money in getting the property back, collection costs, rehab costs, profit margin, and several other items we add in. We do the math 2 ways...what if they pay us and what if they don't and typically go with the lower number. We pay close attention to the loan docs themselves and the assignment chain and alonges to ensure they are in tact. Also, you have to make sure you get and review the collection notes for each file. When you buy a loan you inherit the sins of the previous lender, so if they did something inappropriate, you're the one holding the bag. Bottom line, the gurus make note buying sound easy, but there are a lot of nuances, rules, and regs that many of them don't know. If you're going into that line of investing, make sure you know what you're doing and, if you're learning from someone, make sure their previous roles included a formal credit background and not "I was flipping burgers at Wendy's six months ago, then I learned how to invest in non-performing loans." Good luck to you, Charles.