How to Buy Notes – Know Your Note Buying ‘Enemies’

On How to Buy Notes:

You’ve probably heard of Sun Tzu’s (the famed Chinese
warrior) instruction to his soldiers to “know your
enemy” before going into battle.

Well the same is true with note buying.

“Know your seller” should be the mantra for every
note buyer (and broker for that matter!).

Why?

Because if you don’t “know” your note seller then you
might be entering a negotiation with them without
having any idea of their key negotiating points.

Let me give you an how-to-buy-notes example,
based on a note we recently bid on:

A bank has a 1st mortgage on a single family home in
Salt Lake City that they want to sell.

The borrower hasn’t paid on the note in over 120
days, and the note matured over 2 months ago, so the
whole loan could be called due.

The bank hasn’t served the borrower with a
foreclosure notice.

And they’ve called you in order to find out if you
want to buy their non-performing note and mortgage.

I looked at this loan first from the standpoint of
price – how much could I offer for it. We pulled a
title report and a BPO and looked at comps that a
local realtor provided to us.

And we put in our 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: “I’m not at liberty to say more about our
borrower.”

Something was up in this note buying deal.

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

How-to-Buy-Notes Tips when talking to the Banker

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

“Would it be safe to say that the bank has a unique
relationship with this borrower?” I asked her?

“Absolutely,” she immediately replied.

I was curious – what was going on here
in this defaulted mortgage deal?!

So I kept fishing, understanding full well that she
couldn’t reveal any information to me, but that she
wasn’t opposed to my pressing for more information as
long as she could answer in yes or no terms.

“And there’s a reason why the bank isn’t foreclosing
in this case, correct?” I asked.

“Yes,” she answered simply.

“And you’re probably not at liberty to tell me, but
this sounds like it’s a difficult relationship for the
bank to foreclose on, is that correct?”

“Absolutely,” she answered again. “I can’t tell you
any more than that.”

“One last question,” I asked. “Is it safe to assume
that the bank may be more open to a bid on this loan
that clarifies what exit strategy we’ll be pursuing
with the borrower rather than an actual purchase price
for the nonperforming note?”

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

So what was going on in this note deal?

Well, what I learned in two more phone calls with the
woman I was negotiating 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’s President.

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.

——————————————————-
* The lesson you should take from this How to Buy Notes example *
——————————————————–

If you don’t 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 seller’s key
negotiating points on a transaction.

In this case, it wasn’t 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 from this:

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

2)    Try to find out what the key negotiating points
are for the bank for selling you this defaulted mortgage

Usually it’s one or more of the
following:

a.    Price

b.    Speed with which you can close

c.    Your ability to close (in other words, the Bank
cares more about WHETHER you can close rather than
what price they Buyer is 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 keep all this in mind when you’re next talking to
a Bank to buy notes.

It’ll make you that much better a note buying warrior!

Talk soon,

Dean
PS: If you enjoy this kind of no-fluff info, you will be delighted
with our A-Z NoteBuying Course. It’s full of it!
(And our insane 33%-off Special will not go on forever. Hint, hint.)

And to say it in the words of  Josh Gray
from UpgradedProperties.com in Chandler, AZ, who put the
following (unsolicitedly, I might add) on our forum:

“Dean, I truly appreciate all the information you have provided in
the A-Z Course. I have read ALL the competition’s materials and
it comes nowhere near yours.”