How to buy notes – know your enemies when buying notes
How to buy notes…Know your seller
You’ve probably heard of Sun Tzu’s (the famous Chinese warrior) instruction to his soldiers to “know your enemy” before going into battle.
Well, the same goes for buying banknotes.
“Know your seller” should be the mantra for every note buyer (and broker for that matter!).
Because if you don’t “know” your seller, then you may start negotiating with them without having any idea of their key negotiating points.
An example of buying notes, my latest offer
A bank has a first mortgage on a single-family home in Salt Lake City that they want to sell.
The borrower has defaulted on the bond for more than 120 days and the bond matured more than 2 months ago, so the entire loan can be considered callable.
The bank has not served the borrower with a foreclosure notice.
And they’ve called you to see if you want to buy their defaulted note and mortgage.
I looked at this loan first from a price point of view – how much can I offer for it.
We downloaded a property report and BPO and looked at computers that a local broker provided us.
And we placed our bid.
My representative at the bank hinted that it would need approval from a committee of senior bank officials.
But she was very evasive about answering any of my questions about where pricing should be
order of sale and what was the status of the borrower.
I became a little suspicious and tried to ask for more information, but she immediately shut up and said, “I’m not allowed to say more about our borrower.” There was something in this deal to buy notes.
It was strange that the bank representative would react this way – in fact, it was the first time I had ever seen such a response to an individual loan.
How to buy notes – tips when talking to the banker
So I called her back and tried some exploratory language with her.
“Is it safe to say that the bank has a unique relationship with this borrower?” I asked her?
“Absolutely,” she answered immediately.
I got curious – what’s going on here in this defaulted mortgage deal?!
So I continued to fish, knowing full well that she could not reveal any information to me, but that she
did not resist my insistence for more information as long as she could answer yes or no.
“And there’s a reason the bank wouldn’t foreclose in this case, right?” I asked.
“Yes,” she answered simply.
“And you probably don’t have the right to tell me, but that sounds like a difficult relationship to
foreclosure bank, is that correct?”
“Absolutely,” she replied again. “I can’t tell you more than that.”
“One last question,” I asked. “Is it safe to assume that the bank may be more open to bidding on this loan
it clarifies what exit strategy we will pursue with the borrower, not an actual purchase price
about the unpaid note?”
“Yes,” she replied shortly. “That would be right.”
So what was going on in this note deal?
Well, what I learned in two more phone calls with the woman I negotiated with at the bank was that the borrower was extremely well connected in Salt Lake City political circles and her ex-husband was a close friend of the bank president.
It turned out that a lien on it could create political turmoil for the bank. So the bank was exploring discreet options to get rid of its non-performing loan – namely by selling the notes to a third-party investor.
The lesson to take from this example of How to buy notes
If you don’t take the time to research WHY the seller wants to sell a loan and the circumstances surrounding
the sale, you can completely miss the seller’s key negotiating points in the deal.
In this case, it was not the price. This was what we planned to do to work out the note with the borrower. Price was much less of an issue.
Your How to Buy Notes action items from:
1) Always try to understand WHY a bank wants to sell you a note or set of notes.
2) Try to understand what the key negotiating points are for the bank to sell you this default
mortgage. This is usually one or more of the following:
b. Speed at which you can close
° C. Your ability to close (in other words, the bank cares more about whether you can close than the price the Buyer offers for the discount note)
e. Your strategies for exiting the note purchase (in other words, the bank can determine whether or not to accept an offer based on what kind of buyer you are – are you doing a foreclosure without attempting modifications, for example?)
So keep all this in mind the next time you talk to a bank about buying notes.
This will make you a much better note buying warrior!
talk to you soon
#buy #notes #enemies #buying #notes