How Investing in Non-Performing Notes is Like Playing Craps

[Jean Norton]

New blog post on Non-Performing Notes - If you're a Craps player, you will totally understand the analogy. If you're not a Craps player, or are too risk averse then you may not want to enter into non-performing notes as an investment strategy. READ MORE...

http://www.jeannorton.com/investing-non-performing-notes-like-playing-craps/

[Dion DePaoli]

I am not a fan of that analogy nor do I agree with some concepts that are then derived which are mentioned in the article. 

First and most important.  There is NO reason to assume that purchasing a pool of loans (of any number of units) increases or decreases the odds of recovery and thus profit.  That sounds like a sales pitch to sell more loans.  (crappy ones at that)  

A buyer can buy one loan 'wrong' or they can buy and entire pool 'wrong'.  Having the pool doesn't change that concept.  If all loans are priced incorrectly, whether one or many, losses will occur.  There is a hint of misunderstanding how to properly account for a portfolio as well, but I will leave it at that too much detail to get into.  

To the statements made in the article, if you purchase loans which are noncollectable, well, they are noncollectable.  That doesn't change with the number of units.

For the record, my experience is not from books and/or seminars but rather buying, managing and selling, etc pools of loans as well as one offs.   Many.

I think comparing note investing to gambling cheapens the asset class.  Investing in loans is not a gamble any more than investing in real property.  Or any other types of assets.  In craps, I do not choose the dice number.  In loans, I choose the purchase and the liabilities paid.  So, there is more manifest destiny than the analogy portrays.  Further, this applies to all lien potions.  A first lien can be purchased improperly just like a second lien and vice versa.  

I can imagine at the end of some of those seminars where the pitch to join the network and buy loans from the promoter is mentioned they include the idea that - "...to increase your odds of success, you should buy more than one loan."  Frankly, that sounds like code for you will over pay for these loans in an un-exact manner and as such you should just buy more in case you get lucky.  Horrible Idea.

I have talked to many, many, many newbie note investors who have attended these classes and seminars.  They don't know what they don't know, so everything they are told seems like things they are educated on.  Most importantly, I have yet to hear one of these seminars or promoters actually go through how to price a loan out which is the SINGLE most important COLLECTION of ideas.  If you know how to price loans out, you should be reducing your failure rate drastically.  It's not chance, it's math.  At the least a much more systematic approach than the analogy of rolling dice. 

In the article the man in Texas is not necessarily SOL.  The loan is simply unsecured not noncollectable.  Foreclosure does not wipe out the claim a creditor has on a debtor.  It only unsecures said debt from the collateral.  The debtor is still obligated to pay.

The hidden DIL can be a blessing and a curse.  Deeds convey upon execution.  When the QCD was signed by the Borrower the title to the property was given up and it conveyed to someone.  The issue that the story does not mention is if the property was Deeded (by the QCD) then WHO you purchase that asset from has dire consequences.  If the company takes the DIL in the same name as they take the AOM - interests may merge.  So, the trade is NOT a note trade.  It is a real property sale.  Buying a Note when you should be buying real property is a very bad and seemingly growing occurrence.  

In general, winning and losing happens for any type of investment.  The chances of winning increase more when the participant knows more and understands more and is capable of working with that knowledge and understanding.  The opposite is true as well.  Implying that the investment is akin to gambling is the same as saying that knowledge and understanding is not know.  (I can never know the dice number until after the event)  When someone tells you to buy more things that you don't know or understand in order to increase your odds of success.  That is not gambling, that is being stupid.  

To imply that note investing is more or less of a gamble than any other asset which is open for investment is an illustration of a lack of understanding for the complicated asset class that is note investing.