Note Investing Under-Discussed Topics

11 Replies

For note investors, what are the topics you feel are not discussed enough in the note space ?

My top 3 are:

1. Understanding and evaluating risk as part of your due diligence in calculating bid price

2. Due diligence on the seller and if they are legitimate (have a great example today where I have seen a tape now for 2 years and the sellers BPO goes up every time on vacant assets - one which I did a BPO on and the property is worth $30k (since it doesn’t have any doors or windows) and seller says $140k (up from $100k from April) - where seller has a very negative reputation in the space)

3. Legal ramifications in the industry.

3.

@Chris Seveney I completely agree with your point #2 - due diligence on the note seller. If you are dealing with someone for the first time, this is absolutely critical.  For a buyer, make sure that you are clear about who you are dealing with, what is their reputation, and who else has bought from them in the past (are you dealing with the titled owner of the notes, or if it is someone that is representing the owner such as a broker get clarity on what exactly is that relationship). 


When you are purchasing notes, you will be wiring a large sum of money the seller and then waiting to receive your collateral files. You want to be comfortable with how that transaction will go down, as well as being comfortable that the seller will support any post purchase collateral issues (as per your NSA) and supporting the resolution of servicing transfer problems.  


There are many reputable note sellers in our industry. They like dealing with buyers that are equally reputable and will close as agreed on their note purchases. Seek them out and work to build those relationships so that you will be well positioned to take down multiple transactions over time.

I'm only in the process of getting started as a note investor, but I can already tell the lack of a database, when approaching banks or investors to buy notes they try to sell themselves as a real estate investor and note investor and not knowing how to work the phones to get the asset manager, etc, on the phone, and waiting for money to talk deals.  

@Chris Seveney said: 

"3. Legal ramifications in the industry."

As someone who is trying to learn the lay of the land of this sector of RE, this would be my vote for #1 under-discussed topic -- and not just with notes.

It makes sense, though, right? (Frustrating as that may be...) There is probably a fine line between discussing legal ramifications and offering legal advice. 

That combined with the sue-me-society (more like, sue-you-society) we live in likely discourages folks with helpful experience or knowledge to contribute in this way.

I've received perfect legal advice from someone who would not have been qualified by anyone's standard to offer it. And I've received very bad legal advice from people who are allowed and paid to give it!

As a result, I'm of the persuasion that people should be free to exchange and consume ideas, opinions, and advice knowing that everyone accepts the responsibility for their own choices.

Those who don't do proper due diligence on their deals will have to deal with the consequences.

Why should it be any different for legal matters? After all, we're big boys and girls, right?

I would much rather have to sift through lots of discussion, opinion, and varying experiences that is non-official legal advice than to have a drought of information on legalities.

The former requires some critical thinking and homework, but at least you have insight on potential avenues to pursue or avoid.

The latter can often leave a person with seemingly nowhere to go, or more likely, going somewhere all the while not even realizing there was a potential legal pitfall.

Let the legal ramifications discussions flow!

We discuss this from time to time but I think it's one of the most important, especially for investors new to investing in non-performing notes. I believe that non-performing note investors need to have the motivation to go "all in" or become passive investors, which is not a negative thing in the least. A lot of newer investors become enamored of the stories and want to do the same things but they underestimate what it takes to get to this level and the risks involved.

By "all in," I don't mean necessarily mean "full time." It's more of the attitude that you're going to succeed and stick with it until you can go full time if that's what you want. To me, if you're not going to spend the time and effort to establish your buying and selling relationships, capital raising, note management, and other skills, you're wasting your time. To do this well in the long run, you need to become full time. It makes more sense, in my mind, to go into fix and flips on a small scale as opposed to non performing notes on a small scale. 

Performing notes are a different story.

A view upstream... inner workings of a hedge fund:

1) Bidding, performing diligence, assessing risk, and taking down large pools

2) Large scale asset management: Identifying low hanging fruit, where to focus resources, ROI targets, when to cut bait on an asset, KPIs, ...

3) Servicing: When my servicer tells me what I need will take extra time because of three huge pools landing all at once, I wonder what the process of onboarding at scale and continued collaboration between the fund and the servicer looks like. Also interested in self-servicing and sub-servicing.

4) Managing Capital: Funding sources, holding reserves, tax planning, investor returns. 

Marketing to find/source notes. Vastly under-discussed topic. You need new leads coming in on a regular basis, and, ideally, you want to have several potential transactions somewhere in the "pipeline" at any given time.