I just attended a local RIA club meeting where they talked about note investing – first time for me hearing about note investing.
It was a really nice eye-opener for the opportunities available and other method to acquire property (as worst case scenarios) through note investing.
They offer a course to get educated with Eddie Speed from noteschool.com
So my questions are:
- Since I’m just re-starting my Real Estate Investment career, and wanted to focus on getting one deal before the end of this year, Am I getting ahead of myself by shifting to note investment from fix-flip (financing via hard money)? (assuming I would most likely have to buy a note outside of my state (Florida)
- Is 40k sufficient amount to start investing on NPN and research all variables to make it a good deal?
I know it depends on the purchase price of the note, LTV, Collateral Value and have read Mike Hartzog's postsâ¦ but still looking to hear from someone that started if its enough or should come back when having more funds (how much?) to get better/realistic results vs now being able to buy-fix-flip one property with such funds.
- Has anyone attended to an Eddie Speed noteschool program and is it recommended/worth it ($1000) value for 3 days? (to accelerate learning and further network?)
One of their points is that they will guide you on how to create credibility with HedgeFunds they currently do business with in order to get better quality notes that one can find via internet sites or servicers like fciexchange.com (does that smell like an upsell for the future?)
Thanks in advanced for the feedback, cheers!
All Eddie Speed sell is snake oil you can learn everything right here on BP for free about notes. Don't waste your money on Eddie Speed?
The 1k program will get you a pretty good overview. It is however an introduction where you will be given the chance to sign up for a 15k mentorship program (25k if you want the deluxe). I will say that I think the 15k program was worth it, it kept us out of at least a few bad deals and gave us a running start. If you don't do the Eddie Speed program then find someone who knows the business and will work with you. This is a full contact sport and more complicated then just doing fix and flips.
I have been on BP for 6 months or so and would say that I have not found anywhere near the level of information I have gotten from Note School on BP. Maybe I just need to look harder, but without education you won't even know what questions to ask or what to search on.
My Honest advice for a newbie is to do some flips and then expand into notes. With notes if you get a property back it is not going to be ready for retail so having done a few flips will give you some familiarity with the product.
I have bit the hook as well. Since I have already paid my money, I am going to attend a weekend class in November. I don't have any intention of signing on for the $16k mentorship. What sold me into going to the seminar in the first place was the lack of pressure during our local REI club's seminar. I didn't know that was just the bait. But, in the meantime, I am studying and researching right here on BP; and, await @Bob E. 's every post on his thread.
If you buy car notes, you better know about cars and the market value, same if you buy notes secured by personal property, it's also necessary to know RE to buy mortgages. Start learning about RE.
Don, I'm surprised, but I think you have the money to blow so I'm not concerned about you, you'll be fine. But, you're probably getting ripped.
Some of Eddie's affiliate students/teachers have been on here pumping the classes.
In three days or a week, you'll learn how to invest in Eddie's network, you aren't learning the note business so much
I had a lady contact me here about learning the note business, she has her own money, she has an MBA, she has been in RE for years and owns rentals. I'm putting something to together for her and I'll probably assist her. I'm retired and don't have the time to teach beginning with what kinds of deeds there are or what title insurance covers and doesn't cover.
Yu can buy notes and not have a clue from a broker and they will teach you how to do it in their brokerage arrangement, just like a stock broker will teach you about buying stock from him and make suggestions. If you have the money, they have the time and they may call their marketing teaching.
There are hundreds if not a thousand threads on notes here, much of it is junk, but there are a few folks who have given very good advice. Hard to identify the good ones when you don't know, but posts by Dion and Dave have good stuff.
Have I not addressed enough here about buying notes, the hoops, the collateral issues, foreclosures, due diligence, marketing aspects together with RE comments? I'd guess that there are over 5,000 posts about areas of finance and notes.
And folks want to spend thousands in some short class? Makes me think I was in the wrong business and that I should spend a few days on some course books.
There is nothing about buying notes that requires genius but there is so much information it takes time to really learn what you're doing on your own. You are not going to learn the mortgage/note business in some class with those selling notes. Did you go to a car dealer to learn how to drive? :)
Updated over 3 years ago
Listen to Ken Rishel on lending compliance.
In my opinion Notes are too complicated to learn the ins and outs on BP there are some good general overviews and personal opinions expressed here on BP but no were near the detail you would need to be in the note buying business. At least from what I have read.
I have never been to an Eddie Speed note program so no comment there.. Although if the mentor program was first class and real I would look at paying that for a complete education in the note buying bizz,, long before I would pay the mentorship to just learn how to buy and flip houses.. Buy and flip is much easier to understand.
the most experienced person from the buying NPN that I have seen on this site hands down is Dion Dipoli and he has a Due diligence product that he provides for newer or experienced Note buyers that will give you in expensive professional DD on a note you would buy. Although for me as a Past HML and current NMLS broker ( inactive currently) why you would want to jump into NPN instead of looking for performing especially starting out.. But if your not careful your performing note can soon turn into a NPN.. But that's a choice one makes when you jump into the note bizz.
Jay Hinrichs, TurnKey-Reviews.com | Podcast Guest on Show #222
Actually, NPN interest me because I can see similarities between rehabbing a note and rehabbing a house; just lots more sanitary. I am also interested in generating some passive income. Performing Notes might be a better choice using SDIRA funds.
Thanks to all
Well Don, then I'll whisper this, modifying a NPN is the same as making a new loan, if the note is residential, owner occupied, then someone qualified to make that type of loan needs to do the modification. If it's commercial, Dodd-Frank won't apply.
I can see where you could say I fixed that house or I fixed that note, but doing either are worlds apart.
One other thing, don't be reading Dodd Frank posts here prior to around Feb of this year, too much speculation before the final announcement. Some of what I mentioned last year changed, so make sure you're getting current information, best way is from the CFPB website, not here. Same with podcasts. :)
Always spend a few minutes with a lawyer to get the correct information on Dodd Frank because there are a lot of speculations on the Internet that might not be correct.
Originally posted by @Eduardo Cardena:
- Has anyone attended to an Eddie Speed noteschool program and is it recommended/worth it ($1000) value for 3 days? (to accelerate learning and further network?)
- One of their points is that they will guide you on how to create credibility with HedgeFunds they currently do business with in order to get better quality notes that one can find via internet sites or servicers like fciexchange.com (does that smell like an upsell for the future?)
Thanks in advanced for the feedback, cheers!
I attended Eddie's 3 day event in Seattle earlier this year. Even though there is an upsell to his $15K program, his content was great and there is a lot of experience based knowledge he puts forth. It was worth the money.
I did not enroll in his full program as I can "learn by doing" with help from BP and other peers that I've met along the way. Another resource you may want to attend is the PaperSource non performing note conference Nov. 20-22 in Las Vegas conducted by Bill Mencarow. I attended last year and found it to be a solid pitch-free event with a lot of good content and a room full of both novice and seasoned note investors.
Don't do it. How do I know what I am talking about? I have done 1600 note purchases since 1995 in over 40 different States. I can teach how it works better and faster than he can and I don't want any of your money.
Up front, here is my warning about buying notes. Note-buying can be great and a great business, but here are the pitfalls:
1. Know you are only buying a mortgage! You aren't getting the deed, you have no connection with the owner, and you could be stuck in this deal for years with zero income from your investment, because the owners learn how to master the BK process and you are simply stuck. You aren't in control of the process and might get a house which is totally gutted on the inside. Are you ok with that? Me either. Sounds like I am trying to talk you out of this, but I am not. I am letting you know what might happen. This are the truths and how to deal with them.
2. If I get a list of notes from a bank, I am going to each property and do all my homework before buying anything. I am going to the recorders office; I want to know have they been in default before, do they have any liens, etc. Next I go to the Courthouse to see what judgments are against the owners, are they in the middle of a divorce, is someone about to go to prison, etc. I need to know all these things. I need to check Www.pacer.gov to see if the owners have filed a bankruptcy in the past, and if so, when and how many times.
All that data helps me figure out who is toast and who isn't. I need to know how to approach the owners, and to know if they they are toast, regardless of what they say or think.
Now I need to talk to the owners, to see what their intentions are, are they going to be easy to resolve this or will they stay till the Sheriff shows up to evict them.
Buying notes isn't a good place for a beginner to start. Why? You need to know:
How to get the owners to deed you the house.
How to create a win for the owners while still creating a win for yourself.
How the Bankruptcy process works and how to win evertime you go to court.
How the eviction process works.
How to get a deed when an owner is in jail or prison.
What to do with owners that have mental problems.
Don't ask me how I know this. I have been in some amazing ugly situations in my investing career. I got into note buying immediately without knowing anything and made every mistake in the book, so I know what works and what doesn't. I have helped friends who lost their job stay in their home without making payments for over 7 years. At the end, the bank on their own accord, sent a $1,000 check with a note, please just let go of the home. Kept another home from going to sale for 6.5 years, all the while, no payments being made.
I am not trying to brag, I have just this so many times, I know what works and what doesn't, and all the pitfalls along the way. I would put my experience over anyone else in the Country.
If after reading all this, if you still want to buy notes, connect with me and we can chat more in depth on the phone.
I was enjoying your post on what you were saying until I got to the point you help someone stay in their home for seven years without paying, and it is good you help someone screw the lender you should have help them get a job. That is why no one can get a home loan because of all the deadbeats riding the system. You are right on what you are saying about the notes.
I think the on-going street level investor trend is interesting. Obviously, I like loans and think they are a pretty good asset class to spend money and time on. I think the guru complaint, for me anyway, is the purpose of the program. Those folks who join the program pay a couple bucks to get some high level basic exposure to the asset class and it is not a bad idea. From those who I have talked to over the years and many recently, it is difficult to understand what is taught and what is inferred by the student. So judging the content from a far is difficult. Both Bobs seem content and have a good handle on their direction, others I talk to, not so much.
We could devote an entire 7 page thread to misconceptions that are common with newer investors. If I had to put my finger on the origin of those, I would say it comes from trying to connect whole loan investing with real property investing. The "tickle switch", if you will. The general idea is investing in loans can be a lower barrier of entry to get into real property. Obviously, the current state of the real property market place helps fuel the fire with lower product supplies and higher price expectations and since 'distressed' loans trade for some discount, the bridge is easily made.
My personal belief is, I would rather see newer investors learn what a loan is supposed to be with performance, good collateral and good credit and then learn lesser qualities of those standards before they learn what lesser qualities are as a standard. As Bill pointed out, I believe he is spot on, many of the programs out there and EVERYONE has some training class now, is ultimately about moving product that allows them to make money on. Whether that organization is buying loans and then re-trading them or acting as a broker to their network. That is the part that really makes guru programs a little dangerous.
Nobody is ever going to be more concerned about YOUR money than YOU. If we are going to invest in loans, then make sure you are investing in loans as an asset and not the real property. I always like to say, "Don't get married to the asset, get married to the return.". Understand what your real investment objective is. Do not get swayed by the romance that is created around NPNs or loans in general. Invest for the right reason and invest knowing in full what you are getting into. If you simply want to fix and flip properties, then buy a property and fix and flip it.
If we start at the basics, a loan is made to be repaid. A Mortgagee is not a property owner. There is no Seller of a loan better than the next, there is no secret door to banks or funds, any of them will gladly take your money if they have something to sell. Ultimately, there is simply no magic in mortgages. I think those fundamentals will help really carve out the emerging market of private investment back into mortgages in general. The issue we stand against, is joining the industry under the wrong pretense and with ill-advised expectations.
As with the OP here, can you invest $40k? Sure, will you or should you buy a loan for the entire $40k? No, you will need money set aside to handle capital demands related to owning and dispostioning the asset. How much needs to be set aside is asset specific. So one of your risks then is the set aside portion of capital never makes a return as it sits and waits for its use which hopefully never comes. So if we, in theory, run the numbers and you make 20% on $25k on an NPN you could have achieved the same results with 12.5% on $40k with a PN. To some degree, those numbers are made up, but they are not unrealistic. The point is, what are you investing for, the exotic idea or the return?
If we can stripe away the exotics and magics that are poping up around the asset class, I think there is a very real need and growing demand in the private mortgagee market. It is healthy for our economy and can do some real good overall not to mention the checkbooks of investors and borrowers alike who would benefit. The world needs more George Bailey and less Mr. Gower.
Hi All, thanks so much for the feedback. I have a few follow up comments/questions and reasons I see NPN & PN investing as something worth pursuing.
From the seminar, it was shared that there are around 10million NPN notes that financial institutions need to get rid so they don't have to increase their reserves and to be available in the coming years. True? If yes, I would think it makes it more probable to get a deal/discount vs traditional REO's and then fix/flip.
With my current funds and my local market for fix-flip, I will be limited to 1 property (and that might be good so I don’t get ahead of myself) VS investing in notes at other states where collateral value might be lower but debt higher (but bought at discount) and could work 2-3 deals (5k each) and still keep some reserves for all the due diligence and holding costs until able to exit.... right assumption?
I still consider myself a newbie in investing but perhaps have a little more experience in RE that make me think is worth spending the time learning Notes for the upside of exiting if a loan gets refinanced every 5-7 years (get a bigger return) and other exit strategies (Evaluating NPN Exit Strategies) look doable and I really like the opportunity to offer a Loan Modification that Banks are not willing to do. Then make the Note Re-Performing and have further exit strategies.
I know it requires a lot more work, but seems the rewards are also well compensated.
Still have more thoughts to unload but need to concise them :)
Well said Dion. I suspect what goes on is a lot of hype as no one has mentioned exactly any subject matter in these seminars.
Let me guess; these are the secrets, if you pass along information you damage your own business chances. We teach you how to take advantage of the deep discounts the reality is, they will be sharing in those discounts. Then, there is the old lumping investors together to share in a note, how to find notes, just call us.....really.
What part of the note business was taught? Did they tell you a note originated illegally can't be enforced, to know that, you need to know how notes are legally originated, doubt that was ever mention, as they probably don't know.
Did you learn how a security interest is perfected?
My favorite reading here, who "makes" the note? Who is the "maker".....it's not the lender! If you don't know that you can't understand many of the legal requirements.
Might assume since a bank has the note, it's all legal, no issues in the print and that all servicing compliance is all good......wrong, and folks want to begin with NPNs? Privately generated notes are even worse, most attorneys who get notes off some boilerplate aren't lenders, nor do they get anywhere near underwriting loans.
You need to understand underwriting aspects to determine the quality of the note and the risks involved. I'm sure they don't teach underwriting.
They probably touch on the paper work shuffle, that's easy.
Lets hear the subject matter, not the secrets as there aren't any, from those who think they learned something.
And saying teach you how to have more credibility with hedge funds, horsefeathers, I can tell a monkey how not to stick their foot in their mouth, the lingo, the requirements and pump some hourly paid administrator. If they give you crap throw it back and tell them....what they want is to deal with players with money for volume transactions.
Which bring up another scam, I buy a pool, I pawn the pool off to brokers who represent the pool and they market as if they are the managers.....the chain begins, and those managers may be in my system, I might not even own the pool yet.
Lots of tricks that are left out for newbies, you don't really know who you're talking to.
Let's hear specifics. :)
Originally posted by @Bill Gulley:
Well Don, then I'll whisper this, modifying a NPN is the same as making a new loan, ...
Bill, looks like you just busted yourself on the use of "make" :)
Not entirely, Modifying a note is the same as allowing a new note to be made or having a borrower make a new loan obligation. :)
We all use the term like making deal, the point is when looking at law and regulations, know that the loan s made by he maker who is the borrower.
We'll keep things in context. When there is a differentiation necessary I'll point that out. I have no issue with somene saying the seller made a loan to sell his property I have an issue when someone who advises on Dodd-Frank and says there is no issue for the lender when they "make" a loan or say the borrower isn't responsible as they didn't "make" the loan. :)
The prior post, I was being distracted here, I'll put this out now that I have a few minutes.
I start AB Capital Inc. Then I get a circle of brokers to sell notes for me. Then I get forward contracts to purchase bulk notes at a good discount. Then I give seminars teaching how folks can get into the paper game. I get 100 "students" tell them they have the inside track to a fund manager (oh, I charge them big bucks for that too) then I get a sheet on loans available and pass that out to my brokers, we make a commitment to buy in 90 or 120 days. The students call the brokers and the brokers sell the note to the student. We slice off, cherry pick the package to the students, we even get several students to go together to buy the same note as a partnership (that's another sales pitch) we have 120 days to deliver the actual original note in safekeeping to the students. They get a copy of a loan file. They get tons of documents, assignments, qusip registration numbers and records. We may even give some lame guarantees to reduce their potential loss (out of our discount). We collect the money then take our cut and pass the funds up the food chain to my Capital company and close on the notes splitting them to our buyers. Never cost me a dime except to put the machine in motion.
So, most students will never really know who they are talking to, some guy name Joe at AB Capital that was introduced to me by this great note guru.
It's another straw man operation! If my guys hold the appropriate licenses and the company is registered, no laws are broken here, it's a brokerage operation. I deal in commitments on future inventory!
So, what did you guys learn at school today? :))
To approach from a different angle than Bill and comment on some of @Eduardo Cardena post:
I am not sure the unit number of distressed mortgages is correct, seems pretty high. The dollar figure is somewhere in the $700 to $600 billion mark according to recent reports issued by the Federal Reserve Board of Governors for residential real property.
Banks are not the largest holder of mortgages in the United States, have not been for some time. Fannie Mae and Freddie Mac have a market capacity of around $7 Trillion. All of those loans go into securiitized trusts. I think the bank idea is way over used by gurus and bar stool folks trying to talk loud. The big 5 banks make up most of the market and they collectively do not exceed $1 Trillion with BOA being one of the largest holders at $350 Billion. Mind you, that is total mortgage portfolio size, delinquent is a small slice of that and defaulted even smaller. The notion of specialty reserves being a driving force for distressed loan sales is way over used to reality, they figured how to manage that years ago. Fact of the matter, you will likely never buy a loan from any of the top 20 banks, let along the big 5. Counter-party risk is far too high for them to trade with you. They also do not make habits out of selling one loan at a time. The smaller banks and credit unions do not even hold many of their loans and the ones they do are usually pretty solid prime loans. In the event they do get a default, they are not inclined to take much of a discount, there really is no need as the portion of their balance sheet affected is pretty small. This is not the RTC days, the market has evolved.
Further, NPN pricing is not falling, it is rising. It is rising so high that most private investors can't begin to compete. We are seeing NPN trades 20% above median prices of the past. That puts much of the idea of trading for pennies back into trading for dollars. The last NPN trade we looked at for good collateral traded at 75% of RE Value. For a judicial foreclosure. Long time line. Institutional investors attached to Broker/Dealers are using securities to finance these loans pools, the capital they raise is very cheap by doing so and the more of them who get sales traction on those bonds, the more prices are driven up. On any given day, there is more money than loans available. We have to squash the value ideas that are floating around, they are misleading and frankly wrong.
The market right now is private investors are driven into lower value assets. Typically, those lower value assets carry high capital demands, which is what drives the price down. It is a slippery slope to say the least. What does an asset look like that trades for $5k? Well, it is not gong to be pretty. At that level, advances quickly out run the value of the property. Further, if taken back as REO, marketing time is extended as the typical buyer of that REO is an investor looking for a rental property and is all cash since loan amounts at low levels are hard to come by.
I think in general, private investors struggle with NPN pricing. I could probably make the argument that has pushed them into the corner of the market they seem to prevail in right now, which is the lower level value spetrum. The notion that non-performing assets trade for dirt cheap has pushed them into the portion of the market that trades for those levels they are willing or think they should pay. Is there money to be made there? Sure. But let's just be honest with expectations, you are not buying into loans secured by property exceeding $80k most of the time. Again, in Eduardo's example, $5k puts you into someting around $35k to $40k at best. This is not an idea where $5k puts you into an $60k or more property value, when the price is that low, there is something wrong, a substainial defect, that could eviserate your investment if you are talking about a proeprty value above $50k or the value is simply wrong. In other words, a large discount there should be of high concern. Let me point out, I am not saying there are no deals, I am just trying to make sure we have an accurate picture of what the deals actually look like. I hear often from private investors they think loans for sale on some of the exchanges are not so good and the general invetory they have seen is not of great desire or prices are too high. I would correct every private investor who makes such statements, your expectations are simply wrong. You can not buy a pot of gold for a penny.
So, Eduado, riddle me this - what does a deal look like? Why sort of asset do you think you can get for $5k and then have 3 of them for $15k? The servicing costs for those assets is $5k by itself. So now, you only have half your money left. We have not paid taxes, insurance, property preservation or any legal fees. You will be in a NPN longer than you will a fix and flip house. Anyone who tells you different has a hidden agenda. Time increases legal expenses. Here comes winter, lower level assets in the midwest all need to be winterized if they are vacant...$$$. States have adopted some very harsh rules to make sure Mortgagee's do not neglect properties in foreclosure. It would seem, the lower the value of the neighborhood, the more senstive the county and state is to some extent.
The refinance statistic is from 8 years ago and does not remotely hold true today. Further, credit standards are much higher than they use to be so the chances of being taken out by a refinance are pretty low. Let's not forget, the self inflicted barrier of being secured by a property that has a market value less than the conventional loan miniumn (loan min $50k). Refinances do not go to 100% of value. So, hopefully you can see how quickly this idea becomes fleeting. Yes, there are portfolio lenders who make loans below $50k, they tend to be picky on credit.
Modifications are nice. However, I see those distroted a bit as well. A modification is NOT an exit strategy. That makes no sense. An "exit" is when you leave something so using exit with modification is counter-intutive since a modification is an "extention" of credit. The Mortgagee and Borrower are still in the same loan. I suppose if you paid less than a couple of mortgage payments for the loan you are good, otherwise you have barely scratched the surface of recovering your funds. The general strategy we have seen was get in, collect a bunch of money for the modifcation and then try and sell the loan back out in the marekt. Overall the private ones we have seen have been pretty disappointing in terms of mitigating the risk. Many actually increased the risk of the loan instead of diminishing it. If I had to guess, the culprit was over simplifying the idea that X number of payments means a higher bid for the loan. That is an over simplification of evauating the risk of default.
I am not sure what "further exit strategies" would be on a loan where the Borrower is paying as agreed - pre or post modification or none at all. Being paid in full is up to the Borrower not the Mortgagee. A Mortgagee can not force a Borrower to refinance or sell their property. So as far as exit strateies go from the Mortgagee's hand, there is one (1) sell the loan. That is it.
None of this is novel is here to deter a new invetor from getting involved in the asset class. I like loans. A lot. We need more private investment in loans in my opinion. That said, I just want the lights on when folks step on to the field for the first time. Misconceptions, bad information and unrealistic expectations are not good for the market. These are healthy discussions, which is one of the reaons I enjoy BP. I think the mystism around mortgage investing needs to go away and we need to proceed with mature and managed expectations of what it really means to be a whole loan mortgage investor or note investor. Less late night informoercial and more case study class.
Interesting take on the purchase process. Maybe thats how the low price guru's do it.
I usually see a tape, have a 5-7 days to review, put in my offer, and told if I wine in 2-4 days, wire funds in 72 hours and get the collateral file in a week to 10 days after that. Pretty straight forward with the people I deal with. I also buy direct from several funds and the process is the same.
Dion, that is reality. My fantasy capital company is from a closed loop of investors, and you'll find that those "students" will also trade out of a note they acquired passing it back through the "investment club" the same note may be cycled through the rinse 4 or 5 times in a couple years. I didn't mention that AB Capital retains servicing to make things easier on the students, if they are performing or slow pays. The example is what a local brokerage got busted on when the end investors dried up and the deals went south. But, it can be done legally, but not by anyone I know of.
I think you're absolutely right Dion, the hype out weighs reality. Last week spoke to a President of the second fastest growing bank in the state, taking on affiliate pools and prices aren't a steal of a deal here, basically due to the RE market being stronger and ability to liquidate REOs as they come, you're right, there is no need to dump the bath water.
Bob, sounds like it's par for the course if you're dealing with various sources, but I wouldn't want any off the institutional shelf.
Investors on the street need to learn how to go after the seller financed markets and buy from distressed holders, refi the good ones, rinse and repeat or modify and hold until they can be refinanced. It's the discount together with the velocity of money that gives skyrocket yields, not NPNs. And, that takes a big net to cast to sit and do them all day everyday. But, this is getting off topic.
I'd like to hear what was actually learned in a 3 day seminar, not the nitty gritty, but the title of the chapter and the punch line. :)
If anyone on the Internet tells you, they know how Dodd-Frank work you need to run for the hills because to my knowledge it has not been tried and tested yet.
I am surprised by the amount of new investors who accept the trade procedures as described. They are not new, been around for a while. I know who they are quite well. Even counseled a couple. (clearly they didn't take our advice)
I don't trade like that neither buying or selling. I have very strong negative feelings towards that method of trading. It is not a legitimate picture of what I would consider the "real" market. Its a sky is falling fire drill made to create a buzz and rush decisions and rush due diligence in order for the investor to preserve due diligence capital opposed to loosing the trade to another investor and thus the due diligence capital and time, etc.
I am sure Bill can appreciate this, but rest assured this won't last. There are regulations coming down the pipe right now that will likely start to provide the bridge to standardize these deals. It is already happening in securities. See Regulation AB II. Loan level asset reviews are slowly being standardized and sufficient time to analyse is being forced upon the Issuer amongst other standards. There are both differences and similarities in the two markets but I don't see how the higher level of finance can force standards which will not eventually flow down into the lower levels of the whole loan. The big boys control the market and they have to follow the rules.
In some interesting irony, the funds that do trade like that do NOT have to buy their portfolio like that. I know they say otherwise, but having traded on an institutional level pretty regularly, that is not how it goes. Sufficient time and data is provided from the big boys and in general most institutional counter-parties. In fact when we consult on portfolio liquidations, the biggest key component is the pre-trade setup. Cleaner files, better data means better bids. Not the opposite. While reps and warrants of the past provided for methods to allow for a 'faster' trade, those reps and warrants are not provided in these down stream trades due to counter party risk and execution risk. Not to mention, the folks who deploy these trade models can't afford to have a repurchase triggered. Talk about crashing the car. A piece of dust moving at light speed can cause a nuclear reaction. As a ray of insight, larger trades will sometimes invite more than one indicative bidder into due diligence and actually refund the cost of due diligence if that bidder does not win with final price.
If you are a newer investor, I would suggest you stay away from these types of trades. IMO, you need to have a pretty good handle on your internal model and have a very good handle on the limited data set that is provided. Be very comfortable in the asset class. Develop a standard for yourself. Make it in stone. As you progress in your experience, that minimal data set will grow which should in turn make you more comfortable with your risk evaluation and your bid pricing. Always, always, always give yourself enough time to do proper due diligence. You will grow from the challenges and obstacles not from the easy files.
Sometimes I know one or two of us come across as 'Negative Nancy'. It's really because we tend to be passionate about your success and we have lived through the horror stories first hand. Perhaps you won't like all of what is explained in the beginning of your voyage, but with experience under your belt when you look back at it, that 'ah ha' moment will surely occur.
I agree with you, there been regulations coming down the pipe for a long time, but no one can agree how to enforce it. And on the new NPN investors, they will never follow anyone's advice because all the gurus who teach about notes have the investors believing all the hype and snake oil they are selling.
I guess I am not so pessimistic with investors. I do not think it is a matter of not follow as much as it is not knowing. In general, I think the investors want to follow the rules provided they know the rules as not following the rules can cost them their investment.
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