How to Buy Notes – Note Buying, Knowing your Enemies

How to Buy Notes…You and Your Seller

Sun Tzus is a famed Chinese warrior and everytime before going into battle he would instruct his soldiers to know their enemy.

This same concept applies to note buying.

Every note buyer and brokers should use “know your seller” as their mantra.

Why?

Not knowing your seller will place you in a position where you will be entering a negotiation with no idea of what your negotiating tactics will be.

A How to Buy Notes Example,My Recent Bid

A single family home in Salt Lake City has a 1st mortgage, and the bank want to sell it.

Since the borrower hasn’t paid on their note in over 120 days and the fact that the note had already matured, the whole loan could be called due.

No foreclosure notice has been served by the bank.

The bank has called you to see if you want to buy the nonperforming note and mortgage.

My first objective was to determine how much I could offer for the loan. So I contacted a local realtor to provided me with some comps and then compared it to the BPO and title report that I pulled.

Then I submitted by bid.

My rep at the bank hinted that she would need approval from a committee of senior staff at the bank.

But she was very cagey about answering any of my questions about where she needed pricing to be in order to sell, and what the status of the borrower was.

I became a little suspicious and tried probing for more information, but she immediately clammed up and said: Im not at liberty to say more about our borrower.

Obviously something was very wrong with this note buying deal.

It was odd that the bank rep would react that way – in fact it was the first time Id seen that kind of a response to an individual loan before.

How to Buy Notes-Tips on Talking to the Banker

So I called her back again, and tried a little exploratory language with her.

I am assuming that your bank has a unique relationship with the borrower, is this safe to say?

Absolutely, she immediately replied.

It grabbed my curiosity as I wonderered what was going on with this defaulted mortgage.

So I kept asking more questions to see what I could find out. She didn’t oppose them, but only answered yes or no.

So there must be a reason why the bank hasn’t foreclosed right?

Again…she answered, yes.

And youre probably not at liberty to tell me, but this sounds like its a difficult relationship for the bank to foreclose on, is that correct?

Yes, she simply answered. That is all I can tell you.

I have one last question. Is it safe to assume that the bank is more concerned with the exit strategy rather than price in selling this nonperforming note?

Yes, she answered briefly again. That would be correct.

So what was going on in this note deal?

After a couple more phone calls, I was able to gather that the woman’s ex-husband was a close friend of the banks President. She was also well connected in the political circles of Salt Lake City.

Foreclosing on her could create a political ruckus for the bank, it turned out. So the bank was exploring discreet options to rid itself of its non-performing loan – namely via a note sale to a 3rd party investor.

Lessons Learned on How to Buy Notes

If you dont take the time to probe WHY the seller is looking to sell a loan, and the circumstances around the sale, you may completely miss the sellers key negotiating points on a transaction.

In this case, it wasnt price. It was what we were planning on doing to work out the note with the borrower. Price was much less of an issue.

Your How to Buy Notes Action Items

1. Always try to understand WHY a bank wants to sell you a note or a pool of notes.

2. Find out what the negotiating points are. Why are they selling you this defaulted mortgage? The answer is usually one of the following:

a. Bid Price

b. The amount of time it will take you to close

c. Can you close a deal? (the bank cares more about the fact that you can close rather than the price you are offering for the discounted note)

d. Your note buying exit strategies (in other words, the bank may determine whether to accept a bid or not based on what kind of buyer you are – are you a foreclosure operation with no attempt at loan modifications, for example?)

So the next time you are taking to a bank about buying notes, remember these key points.

Itll make you that much better a note buying warrior!

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