Some ideas for new discounted note buyers when it comes to due diligence.
One of the things you really look at when you’re deciding on a note to buy, at a discount in the open market on the street if you will, is what kind of due diligence do you want to conduct. I’ve been doing this since 1976 and I’m telling you right now, even when you do all the due diligence’s possible, you always feel like there’s another thing you could have done. Now that said, what provides safety in a note? Well first of all, let’s look at the location quality of the property that acts as a security for that note. Is it in a top notch area, or at least a blue collar area, where you’ve got middle class families just living their lives and are everyday people. You like that. You don’t want to get into an area where you feel like you’ve got to shoot your way in and out. You want a place where you would live. Now that’s different for different people, right? The thing is, we all have different comfort zones. So keep that in mind. The second thing you want to look at is, how old is this note? Is the ink still wet on the note signature or is it several years old? What’s the payment record? Do you get to see the credit report of the payer on the note? There’s a lot of these things that come in to play. It depends, also, on the seller of the note. Is it a private party that already owns it or is it an institutional lender? It’s much more difficult to buy notes from institutional lenders than it is from private parties. It’s sometimes buying from banks and other institutional lenders, like credit places that are like having street front offices, it’s very very difficult. It’s almost like pulling teeth. Now, one of the competitors you’re going up against when you try to buy notes from your local bank branch or even just a local bank that’s not a large too big to fail type of bank, is that they only want to sell these notes to bigger investors that can buy more than one. You know my note fund, the BawldGuy note fund, buys anywhere from twenty, thirty, forty notes at a time from one lender and we’ll buy notes from several lenders at a time. So, one of the things you want to concentrate on if you can, is try to find a source that’s private in nature and not institutional, you’ll do a lot better. Besides, most people don’t have the kind of money these bulk buyers have in the first place, so you’re really competing in an arena that’s unfairly biased against you to begin with. Now, when you’re looking at “Is this note going to be safe for you?” maybe the #1 factor that exists and allowing you to sleep at night is: what is the value of the property versus the amount owed on all the liens on the property? If you’re buying a second position note from a private party and it’s against a house that’s worth $200,000, the second note balance is $35,000. Well if the first note balance is $100,000, you should probably feel fairly safe because you’ve got $65,000 ready to go in front of you, which means if something happens in the market, and that property goes down to 170,000 you can still sell that property in foreclosure and you’re going to net out enough that it’s going to be able to pay off the first and the second that equal only $135,000. You want to look at that loan to value, we call it LTV. If you’re not comfortable with that, walk away. That loan to value is really a warranty for you and it’s not a very reliable one at that. I don’t care how much equity’s in front. This is why, when you’re beginning, you want to buy first position notes if possible. Although, I’m going to contradict myself here and tell you, if there’s a tremendous amount of equity, 50% and you’re buying a fourth like my very first note purchase back in ’76, you’re still going to be fine. Because you can have all kinds of things happen negatively in the local market and economically on a national scale, and you will still be okay because of all that equity you had to spare. So remember, when you’re doing your due diligence, there are a myriad of things you need to check. Most we don’t even cover because most people just don’t know what to look for and you really need tutoring on that. You need to have a mentor, but the #1 thing you want to look for, along with location quality of the security property, is the loaned value relative to the liens on the property. Especially the one you’re buying. We’ll continue this series later.