Are you selling or thinking of selling notes? In this episode, Scott Carson runs down fifteen items to keep in mind if you’re looking to sell. This list is also applicable to those who are interested in buying notes. The important thing to remember is to always have a list of questions and to make sure those questions are answered. Knowing all of this will save you a lot of trouble and pain in the future. Being fully prepared is key whenever you’re considering diving into the world of notes.
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Fifteen Critical Items When Selling Notes
I’m excited to be here. Hopefully, you’re out rock and rolling and kicking ass and taking names. One of the things that we always see with this time of year obviously is banks that are coming out and looking to move assets. It’s not just banks. We also have a lot of private sellers. We also have a lot of people that have originated loans this year that are looking to cash out so they can either invest in other assets or looking to purchase new assets. They want to use the capital or the money that’s been tied up in their owner finance note for their note to double up, double down, move from one asset class into another one. Use that money for purchase towards a new asset of some sort.
I have seen a lot of people who were sending out emails and posting stuff that they’ve got a note for sale, but they’re leaving so much of the relevant information off of their posts or they send an email blast out or an email out to their database of investors. Maybe it’s not on blast, maybe it’s a small list but they still continue to leave a lot of questions unanswered when they only send partial information. When they send a picture of the property and only 2 or 3 items. I thought it would be irrelevant to go in and create a list of fifteen items and discuss each item a little bit so that you’re better prepared as a note seller. Now, we see this happening quite a bit. This is how people move an asset.
You also see wholesalers that are getting more and more into the notes selling business because they see lists, they’re tapped into it. They don’t want to do all the work. They want to basically have to throw stuff against the wall to see what sticks. Single hop up and say something. Hopefully, they’re all excited about a specific state and area. If you can provide relevant information in your post to him, maybe it’s not in the photo, especially in social media these days. Many people try to cram so much information in the photo and it’s too small, too shrunk down. It doesn’t look good. Take the time and make a point. If you’re looking at assets or you’re looking to buy assets, you want to make sure that these questions are either answered or asked.
What will happen is people have to come back to you to get more information. The more you can provide information on the frontend, the better off you’ll be. The faster that transaction will close and you’ll often be a lot better off and be able to make money faster by selling the asset faster or be able to broker the asset faster because your buyer will have all the information that they’ll need. They’ll have all the relevant, either to give you a quote for counter or to bid on your assets too if you’re not going to give them the value or the price. When we start talking about some of the information, it’s still going to be dependent on double-checking the information, pulling values and doing your own due diligence on the asset as well. Those are some important things to keep in mind. You’re still going to look up eyes on the property. You’re still going to pull title reports if you’ve got it.
You should never fund before pulling the title and get a copy of the collateral. Without that information, you can still make an offer. These are the fifteen critical items, 15 not 2, not 10, 15 critical items that we see to be effective as note buyers and sellers out there in this market. Some people are talking about less, I want to talk about what you really need, the fifteen critical items that you need. Hopefully, you enjoy this. If you’re reading this, you may want to go over and check out the actual video on our YouTube channel, YouTube.com/WeCloseNotes. Subscribe while you’re there. I put together a short PowerPoint so you will be able to see this and go from there. Hopefully, that’s valuable for you. These are the fifteen critical points to give you an opportunity to be able to pull that information and use it in your checklist. When you’re looking at deals, you can have a short checklist of things that are available for you.
The Lien Position
We call this the fifteen critical items when selling notes. The first thing first is you need to know the lien position. Is it a first position? Is it a second position? Is it a contract for deed? Not quite the loan type, but is it the first, second contract where they all have relevant information? If it’s a second lien position, you’re going to need to know more information about the first. If it’s the first, that’s great. You’re in this space and we’ll get to another critical item, but you need to know your fifteen when you’re looking at buying or selling the note. A lien position is a first lien or a second lien. A second lien, you’re going to pay a lot less for. Second lien all does a little more due diligence on the first lien. What we’re going to be talking about here too is the fact that if you know if it’s first or second lien that’s going to affect your pricing, your point, especially when you start getting into other things along the way.
Contract For Deed
In the second lien position, you’re probably going to pull a title report further along in your due diligence. Once you agree on a price to contract for deed, there are specific rules that are different, but a contract for deed in some states than they are in a first lien position. In some states, on the first true lien position, you may have a redemption period like in Alabama and Minnesota. It’s a year from the time we foreclosed on a contract for deed, you may be able to evict versus foreclosures. It’s important that a lien position is out there.
What do I mean by status? Is it a performing loan, a nonperforming loan or a reperforming loan? If it’s a performing loan, great. I’m looking for performing notes. That you’re probably going to buy off of yield basically somewhere between 12% to 15% ROI, maybe more, maybe less, depending on the balance and other things in the critical items. If it’s a reperforming loan, you’re going to want to know, it’s reperforming, but it was once not performing. What are the terms that we’ll get to the lead to other things? The status is one of the most important things out there. Performing, nonperforming, reperforming, they all have a different thing. Reperforming is not bad. You want to make sure, how long has it been reperforming? If it’s reperforming for twelve months, it is true reperforming.
Three and this is the thing that kills me. You need to know the full address of the properties so you can see what property type it is. Is it a 3, 2 condo? The full address is important. Many people are sending up lists where the list is sanitized. What do sanitized lists mean? It means there’s no full address. They removed the street address, so you’ve got the city, state, zip and then the rest of the information. That doesn’t help you pull numbers. There’s one big fund out of New York trying to sell millions of assets by providing a sanitized list and then you’ve been on the sanitized list and then you get to pull that. Nobody’s going to bid on that.
That’s counterintuitive to us as note investors and paper investors to pull values on stuff. What does it look like? Know the full address so you can see what’s around it. Is it near big box stores? Is it on the water? Is it off the water? Is it by train track? Those are all things to the full address. Which unit is it if it is a condo or a townhome? Those are all important things to keep in mind. If you know the full address, you know the bed, bath and square footage. You can rock that bath and square footage but we still want to see the comps are in a neighborhood that we’re pulling off. That’s why if you don’t provide a full address, I want you to look at it and I know 99% of other investors aren’t going to waste their time looking at a deal if you don’t know the full address. I don’t care to say, Miami.
Unpaid Principal Balance And Payoff
One thing to keep in mind, I know that some people don’t want to put the full address down because they’re trying to wholesale the address. I get that. I understand that they may not have the property under contract and we’re trying to flip it for a buck. I get it. Go ahead and sign and have your buyer sign an NDA. Have them sign hopefully a nondisclosure agreement or an NCND, Non-Compete Non-Disclosure and then send that list out to those people that have signed that list. Number four is you need to know the UPB. What does UPB mean? Unpaid Principal Balance and payoff. It’s basically what’s owed on the note. The important thing is unpaid principal balance does not include the payoff. It doesn’t include the back pays.
I’ll give you an example. A guy called me who wanted to know what he owed in his loan. I go, “You owe $88,000 and that’s your full payoff.” He shows me a statement that they only owe $44,000. I also was like, “That was a few years ago. You’ve got 72 months of back payments that you’ve not paid.” He’s like, “That makes sense.” We, as note buyers, buy off the unpaid principal balance. The only time that we’re going to buy a full payoff is if there’s a ton of equity, value above. If the property is worth $100,000 and they only owe $45,000, you want to make sure it’s a lot of equity there. What’s the payoff amount? What’s the number of months plus the legal added to it if we got the true payoff amount?
Value Of The Property
That’s the important thing is knowing UPB and the payoff amount or as sometimes they will say true legal balance. Sometimes you’ll see them in spreadsheets. Other times you’ll have to figure that out yourself and put that number in there too. Those are the first four, lien position, status, full address and then the UPB and payoff. That’s the first four. Five is the value of the property. We talked about this briefly, but that goes along in line with others. You need to know some value in the property. I would prefer to see the BPO. A BPO is a Broker Price Opinion of the property or at least a comparative market analysis, CMA from a true realtor. Zillow values, online values are not accurate because the condition of the property could be rough. It can be in a rougher area.
Try to have some valuation where you at least put eyes on a property, somebody who is looking at the property and pulling some numbers. If the best thing you can pull is the Zillow, which is Zestimate, at least get some evaluation. That way it’s important to use as a note seller. If somebody comes back with a bid and they’re way high, they probably haven’t done initial due diligence on it and they’ll end up countering their bid. I would much rather deal with a note buyer who understands the value of the asset, especially if I’ve done the work to pull a BPO in numbers and CMAs. Somebody who’s on the right track can go from there. They are much more likely to close that way. Those are the top five. Once again, lien position status, full address, unpaid balance, payoff and value of the property.
It takes us to the next round of the fifteen critical items to have when buying or selling a note, you need to know the interest rate. Also, is it an ARM loan for the right mortgage or has the loan been modified? That’s a critical thing. We see this with a lot of loans that went through HAMP modifications where the interest rate is dropped down and they go to a 2% interest rate. That’s hard, especially on a performing loan or it’s been modified from the original 7% down to 2% for you to make it. I don’t care if it’s performing or nonperforming. It’s hard especially with the performing on reperforming loan to buy it at a point that makes sense to make a good yield on your money. If it’s at a 2% interest rate and it’s performing, that’s going to be a rough thing. You’d only offer $0.25 on the dollar to get an 80% yield on it. Keep that in mind. You need to know the interest rate current and past and if it has been adjusted or been modified.
Due Date And Origination Date
Seven is you’ve got to know the due date. When is it due for? There are some dates that are important, when it was originated the next due date and the last payment date. If those things aren’t the next month showing, it’s nonperforming. If it shows due dates of January 1st, 2019, that’s now eleven months behind. The origination date, the next to last pay and the number of months behind, are important dates. It’s performing, nonperforming or scratch and dent. Scratch and dent basically would be 30 days behind where it asks.
The term is the number eighth item that’s critical. The number of the month means months remaining. Is it a 180 or is it 15-year on and it’s 180 months versus a 360 so your principal and interest, that’s going to change quite a bit, especially if it’s a 30-year and or a 40-year. You’ve seen that happen in some loan modifications whereas a 40-year amortization where the payment is low. You’ve got to keep that in mind. You’ll see a 10-year, 15-year, 20-year or 30-year, sometimes a 40-year. You can even see a five-year in some of the loans we’ve looked at. Those are 60 months. Term is going to be an important number that you need to put in your calculator when calculating your yield, when you’re buying or selling the aspect of it. You have to always consider if you’re buying, take a look at those numbers. If you’re selling, you have to think about what your buyer is looking for and understand that when selling.
Number nine is occupancy. It’s one of the most critical things. Is it occupied? Is it owner-occupied? Is it tenant occupied? Is it unknown? Is it vacant? It’s an important thing. If it’s vacant, you’re probably not going to have a performing note there. If it’s tenant-occupied, then you probably want to pull rent rates and see if Peter is robbing from Paul to pay. If it’s unknown, that’s okay. That’s where you would want to double-check and say, “Let’s check the utilities. Let’s call the power. Let’s see if the gas is paid.” Owner-occupied or tenant-occupied is different. If it’s tenant-unoccupied, you can’t speak to the tenant about the modification if you’re buying the notes. You need to try and track down the owner. If it is owner-occupied, great but if it is the tenant, it also leads you to often finding if the borrower owns other property in the area or surrounding areas. It can be a nice critical thing.
Occupancy, owner-occupied, they’re going to work with you a lot more. Tenant-occupied, they’re not going to work with it as much. They may, especially if they own other assets, but with unknown, try to get someone to drive by before you say, “Is it occupied?” Who knows? Occupancy is key, especially with your exit strategies as a note buyer. If it’s vacant, you’re probably not going to get it reperforming. If it’s vacant, it’s probably going to need a lot more work on the inside. Hopefully, the air conditioner is still there and goes from there.
Ten is one of the most overlooked items when it comes to buying or selling a note is who the servicer is? It’s important because first and foremost if they’re self-servicing, that’s a big no-no. What does that mean? “Scott, I still service, I collect checks from the borrowers every month on this stuff.” Do you have any software you’re putting it into? Are you collecting cash or checks? Do you have copies of the canceled checks? These are all important things. What statements are you sending out monthly to them? I don’t like notes when they’re being self-serviced. It’s a big no-no for the most part. I won’t buy them. There are too many discrepancies in the paperwork versus if it is with a third party like Madison Management, even FCI. I’m much happier that it’s at least with a servicer versus non-servicers because there’s a third party that’s collecting, sending out and making sure you’re staying compliant. Another important thing is not all servicers are created equal.
We bought a lot of contract for deeds from a company whose servicer was horrible and targeted that servicing company because I knew if we could get ahold of the right party contact with the borrowers, they wanted to talk to somebody where that servicer lacked that borrower outreach aspect of things. They try to make it automated. Borrowers aren’t always going to be able to work out on their own and then you need to get ahold of somebody. That worked in our favor when buying and selling. We can find out that it was this one servicer and we get more excited versus it being somebody else. Not all servicers are created equal. All of them have their own issues.
The idea is getting to the point to know which ones have the issues that you can survive with or work through. It’s an important thing to keep in mind that there are fifteen critical items. That’s 6, 7, 8, 9 and 10. Six is knowing the interest rates. Seven is the due date. How much is due? How many months behind? Eight is the term, the number of months remaining or how long was it financed for? Whether it’s a 5-year to a 40-year, God forbid anybody doing 50-year mortgages. Nine is the occupancy, is it occupied? Is it vacant? Is there a tenant in place or is it owner-occupied? Ten, who is the servicer? If there is no servicer, I often say, “Watch out. I’m probably not going to buy it. If it is with my servicer, that’s a great thing too as well. That takes us over to 11, 12, 13, 14 and 15. The last five in the critical items needed when selling notes.
Eleven is legal status. It’s a nonperforming. Why don’t you buy that? Has the foreclosure started? Have you started a legal on it? Has the date been filed so that you can start counting down the number of months or the days it takes to foreclose in a specific state? Is it bankruptcy? Has the borrower filed bankruptcy, Chapter 7 or Chapter 13? If they have filed that, you are able to check that out by jumping on PACER and looking at PACER.gov to see what the borrowers have filed. That’s an important thing. If it’s performing note, you don’t worry about that but legal status is important, specifically if it’s been performing or nonperforming, in that aspect of things. What do I mean by that?
If the borrower is in a trial payment plan and legal was done, you can then suspend it or if they are not following through with the trial payment plan, then you can start up the legal process all over again. You also want to make sure, especially in states that have a statute of limitations on what they can go after for the last 4 years or 5 years. You need to make sure, “Has it been five years since the bank started something so that we can go that route and go from there?” It is an important aspect of things that most people don’t think about, origination type and not all loans are created equal. Some are downright ugly.
A lot of people have taken workshops, “I’m going to be an originator. I’m going to put owner financing on our property,” and that actually does not work in your favor. Oftentimes it’s, “I’m going to take a property back and fix and flip it or fix it up and then that’s the owner financing.” You’ve got to be careful how you structure that off. A lot of times, people are looking to sell their notes off to have capital back or to get their profits into it and it’s tied up in a note that does not make sense. I prefer institutional debt and institutional notes because they’re underwritten cleanly. You have collateral. You have files. You have a 1003 loan application. If it’s owner finance especially if somebody is doing just one, it may not be clean. You may need to have an RMLO and take a look at it, especially on a regular basis.
That adds to a whole different aspect of critical items especially if it’s new owner financed. There is no seizing that goes back into the number of payments. There’s newly seasoned and I don’t value that. You need to know these critical items and name your down payments. If it was basically financed with nothing down, that’s not a good thing as well too. Thirteen, taxes owed. What’s the tax status? Is the borrower in a tax payment plan? That’s a critical nature of things that going to tax sale. They may be on time with their mortgage but may not be on time with their taxes. The payment plan is maybe way behind.
It’s a critical thing that you’re going to look at and you need to know this before making an offer because you can jump on about every county website out there and check the amount of taxes owed on a specific asset. It’s why you need to know the address to check taxes. You know the owner’s name when you’re looking at the loan amount and going from there. Fourteen, I put this in irrelevant borrower information or story. You’re going to be able to tell some information along the way, is it owner-occupied? Is it performing? I don’t even know much about the story. If it’s reperforming, what happened? They lose their job, they get sick and get back to work. Give me some relevant information story especially if it’s nonperforming or reperforming. If it’s performing, great and we’re fine. A lot of people forget about and tell the story, the borrower was out of work with their backend or the borrower brought $10,000 to the table to reinstate their loan. That adds a lot of value to it.
People leave that off. You need to have that. What’s the situation with the borrower? What’s the story? Tell me their country Western song and we’ll go from there. Fifteen is the most important thing and this drives me bonkers, what do you want for it? How much are you looking for? Are you looking for a wholesale fee? If you’re wholesaling, are you looking for a large chunk? What color? What discount are you looking for? If you’re looking at buying a portfolio, people may tell you to give them a loan level pricing. Here’s what we’re looking for. If they won’t give you the loan level pricing aspect of things. What does the loan level pricing mean? It means what they’re looking for in each asset. Maybe they’ll give you a little bit of color. That was a discount they’re looking forward to the type of pricing roughly.
Color is important. It means a discount. That goes into, “What do you want for it?” I’m looking for 75% of the UPB. We’ll take a look at it. We’re looking for 40% of the fair market value, 50% of fair market value or on the performing notes, I’m willing to sell it at 85% LTV. It will have a 12% to 15% yield on the payments. If it’s a nonperforming, I’m looking to sell it at 60% of UPB because there’s a lot of equity behind it. What do you want for it? Tell me what you want so that if you want $0.95 on the dollar, I’m not wasting my time going back and that’s probably the most critical aspect of it. What do you want for it? If you don’t know what you want for it, then why are we wasting time? That’s the most important thing. What do you want? What are you selling it for so I know to look at the right numbers? I’m not wasting my time and wasting your time coming back with a low ball status.
Let’s go back here and do a recap once again. Lien position, you need to know if it’s a first or a second, a contract for deed. What position is it in? If it’s a wraparound mortgage, you’ve got to put that in there too. What’s the underlying lien? You need to know what lien position it’s in. Seconds have a big thing. It will be in a second lien or home equity line of credit or a private second. You need to know the status. Is it performing, nonperforming or reperforming? Three is the full address. I need to know the full address so it allows me to check out and see what kind of true property it is. What type of asset, residential, commercial, single-family, condo or whatever it might be. No sanitize lists, no address means no time wasted on pulling a number so I can give you a number back.
Four is what’s the unpaid principal balance and payoff? What did they owe, where is it? Is it split up in 50/50 or do they have the full legal balance way above what the value is? Is there a ton of equity that looks like or is there no equity? Five, the value of the property. Give me some valuation of BPO compared to market analysis. Don’t give me a Zillow value, but give me some value that I can take a look at and see if it makes sense. A great example is someone called me and said, “I got a note. It will probably be worth $230,000.” The $230,000 is the Zillow value. When you look at the photos online, it’s not $230,000. It’s more like $110,000 or $115,000 at the most. Six is the interest rate. I need to know, is it fixed? Is it an ARM? Has it been modified down? Is that stair-stepped up from basically 2% to 3% to 4%? Where is the interest rate at? Seven is a due date and an important thing is the origination date.
I need to know when is the next due, the last paid date and the number of months behind. Those are all critical factors and performing or nonperforming notes. Number eight is giving me the full term. If it’s a 30-year term, a 40-year term, a 60-month term, a 120-month term or 180-month. Where is it on the term basis of stuff? How many months are remaining? Nine is I need to know the occupancy. Is it owner, tenant or unknown? It’s the big difference in pricing, the true valuation of an asset and what needs to be done if you don’t know the occupancy.
Ten is who’s the servicer? Not all servicers are created equal. Some are horrible. Some are great at communication. Others, that’s a whole book of communication. Some are more of the borrowers doing everything online. I don’t know how they did and they may not be the savviest of borrowers. That’s where it comes in. They may want to have more of a hands-on approach. Some servicers I say no to, others I say yes and others identify targets so that I know I can move into my servicer who’s going to do a better job. Also a big no-no, don’t be a self-servicer. It reduces the value of the note. The bank is self-servicing it themselves. You’ve got owner finance and it’s collecting, it reduces the value. Pay the $15, $20 a month to put it with a servicer and it will go a long way to getting a bid.
Eleven is legal status. Has the foreclosure begun? Has it not begun? How many months behind are they? Did the borrower file bankruptcies? Is it Chapter 7? Is it Chapter 13? Do you have the PACER report to go along with? That’s an important aspect of that.
Twelve is the origination type. Was it owner financed or is it the institutional debt coming from a bank? If that was owner finance, was this one time they can do in a year? If you do it more than once, they need to have an RMLO. Let me see the RMLO documents to make sure this is a true Dodd-Frank compliant mortgage.
Thirteen are taxes owed. What does the tax say? Taxes are up-to-date. Taxes are way behind. There’s a pending tax sale. That’s an important thing. Fourteen, is there any relevant backstory to the borrower? Is there any relevant information we need to know about that? If they were out of work, their mother died, they’ve moved out of the country or they own other real estates. Every deal has a backstory. Every note is a country Western song waiting for you to figure it out. Grandma got run over by a reindeer. The dog died. Fifteen, what’s the price that you want for this? What are you selling it for? Give me some numbers on it. What do you want for it? Give me some color so I can make a relevant bid or accept your bid. I can accept what you’re looking for and create a win-win scenario. I should probably put that thing first. I need to know a specific number that you’re looking for, especially on a pool basis. Give me some color, discount parameters then we can go from there.
Recap Of All Fifteen Items
Those are the fifteen critical things. You would be surprised how many times we see things where there are only 2, 3 addresses and the unpaid balance. Tell us a story. Give us the things to talk about. The important thing is if you’re going to be posting this in an email blast out, take a few minutes to write out the story. You can put many of these things quickly in a PDF. If you can do it like lunch and learn, a picture of the property. If you’ve got multiple pictures, that’s why it’s a great thing. Put the things in there. If you don’t know the bed and baths, don’t worry about it, but give me the full address. If it’s occupied, it’s an important thing. What are the taxes owed? What’s the situation?
Many banks and asset managers will provide notes on their spreadsheets. What’s going on? Where’s it at? What’s the story? That helps out as well too. Here’s the important thing too. If you’re going to mark it out for sale, take some time to get a good photo, clean it up to send somebody out to take a look at it or pull off on a previous BPO or something. A photo tells a lot more than a blank photo. I have an asset here. We’re visual people for the most part. If you can have someone take a quick photo, it would be great. If somebody can drive-by, great. If you can sit there, you have to let me take a quick video and talk through the numbers, it’s even better. You’re much more likely to sell an asset if you know the numbers and know the story.
We’re not talking about writing a novel here. We’re talking that everything that we discussed can be discussed via video in 2 to 5 minutes. We know the neighborhood. If you’re driving by the neighborhood, feel free to share if you learned something about the asset too, that maybe the bank didn’t know about. “There’s a burnout house next to it or there’s crack being sold or the crime map of the area is rough.” You have to realize that a lot of times, people may not know exactly everything going on and that you, buying the asset on an individual basis, might find some information that they can pass on that can help that seller identify opportunities. Maybe they discount the asset and discount the sales part and go, “I did not know that.” Let’s fade your bid some and go from there.
That’s an important thing to keep in mind. There are many critical things when you’re buying and selling out. Those fifteen items will help you get all the information to the buyers if you’re selling or it’s also the right information to ask if you’re buying. Make sure you’re a true buyer, not a tire-kicker. Make sure you’re really buying for your own portfolio. You’re going to learn much about notes by going through and behind for your own portfolio versus trying to broker and wholesale to other known investors out there. Go out and take some action. Hopefully, those fifteen critical steps help you in buying and selling notes and in that way, we’ll see you all on the top.