Any Creative Strategies for Buying or Selling Notes?

Question

Hey BP community 👋

I'm diving deeper into the world of real estate notes — both performing and non-performing — and I’d love to hear how others are structuring deals.

👉 Are you using seller financing, partials, or JV partnerships?
👉 What’s worked best for you in this market?

Would love to exchange ideas and learn from others here. Feel free to comment or message if you’ve got experience in this space!

Doug Smith · Answer

That's how our company started. I was handling "special assets" for a bank back in the mid-2000s prior to the crash and we started this company to buy loans out of banks. Contrary to what "The Big Short" portrayed, most of us saw it all coming. We started with commercial (retail centers, office buildings, etc) then moved into residential loans in about 2009. We slowly moved out of that space in Q3 of 2014 when some of the bigger funds started moving in to push the pricing of NPLs through the roof. We found better returns in other asset classes, but I think I can answer your question with a great deal of authority. I feel a lot of the note "gurus" have it wrong. First of all, go to their Linked In page and see what they were doing for a living prior to getting into or teaching in the note space. I think you'll be shocked at how little background some of these people have. We only did NPLs. We found the "in and out" nature of them lined up well with what our overall business model was. The long-term nature of performing loans really didn't align for us. With an NPL, I think the key is to "back into the parking space". First, start with the as-is value of the underlying collateral as well as the as-repaired value. Determine your holding costs/time value of money, legal/collection costs, and any rehab you would need to do as well as any reserves for unexpected contingencies. That provided us with our "strike price", or the maximum we would pay for the note. They we stuck to our pricing model regardless of what others thought of the deal/tape. We did not use leverage. Partially because it wasn't even a thing back then, but higher interest and the sometimes long-term period before an asset starts to return can quickly eat up any profits and actually put your operation at risk. We didn't leverage NPL buys at all with that in mind. Would we go back in head first? Possibly, but I would really need to see that the assets prices were low enough to provide returns that would eclipse our private lending and real estate development efforts. Thanks for posting that. I enjoy these discussions.

Chris Seveney · Answer

All of the above worked. I started with my own funds, then did JV's and hypothecations and when that got too much moved to a fund model.