Question: “Hi Doug, I saw some of your old posts on ******. I’ve bought a few notes and have been looking to call small banks and hedge funds, since I’ve not had much luck with so called note brokers or local hedge funds. I think you said you buy from banks and someone said finding hedge funds to buy from is like finding a unicorn. Do you think there are enough small banks to call on for buying a small amount of notes?”
Answer: Thanks so much for the question. I don’t recall which posts you speak of, but the number of banks and hedge funds willing to sell assets are dwindling quickly. I just returned from speaking at a conference in Phoenix where most of the legitimate professional buyers were struggling finding quality assets to buy at a reasonable price. You aren’t alone (honestly…we’re right there with you). It’s much, much harder to find real, quality assets than it was five years ago.
There are a small number of note brokers that are legit. Most pedal daisy-chained and over-shopped, overpriced notes that no one wants. In many instances (most instances actually), the actual owner of the note doesn’t even know it’s being listed for sale. A few years back, I had someone reach out to me through a social media platform and, over time, convinced me that they were a legitimate end-buyer. We rarely sell notes, but when we do, there are only a handful of legit buyers that we would go to. Remember that when you own a loan, you are being entrusted with the personal information of the borrowers. Allowing someone access for due diligence is a risk. To make a long story short, I sent the package to two of my well-known buyers and the “new guy” (after he signed an NDA). All parties knew that I was only giving it to three people. Within 48 hours of putting the tape out, my two regular buyers called me upset that they both had not only been shopped my list by the “new guy”, but also others that the “new guy” had shopped it to. In another instance, a supposed fund that I met at a conference I spoke at bombed a small tape that I shared with them for a potential purchase all over the internet. When I asked them to stop, they just kept right on shopping it. I actually had to have my attorney send them a cease and desist letter.
By the way, I’m sure you’ve learned to be wary of anyone using terms like “I have access to,” or “I’m direct to.” These are simply daisy-chainers who have received a tape from a guy who received a tape from a guy that heard of a guy…Unless I know who the seller is and I am double-dog-sure they own the asset, I don’t waste my time with them.
Regarding buying direct from banks, unless you are buying small commercial deals, there is usually nothing to buy from them. Banks have gotten smarter and usually work notes out in house. We do get some deals from them still, but it’s pretty rare and it’s only because they…every once in a blue moon…have a single deal to sell. Over the past handful of years, the pricing on those notes has been extraordinarily high. Banks just don’t have the non-performers that they once did.
The best source I have found for one-offs are the servicers themselves. Who is handling the servicing for the notes that you do own? When one of their clients wants to sell a loan, they don’t want to lose the asset to another servicer, so they will reach out to others who regularly buy notes that hold their notes with them and put it out for bid to that group. I’ve found that to be my best source over the last few months. If you have enough notes, you might want to use more than one servicer to simply have a pipeline of loans coming in. Anything you buy from them, should stay with that servicer or you won’t be alerted with one of their other clients wants to sell something.
There are also a couple of groups that do legitimately buy pools from larger funds that are buying directly from GSEs. In these cases, the GSE wants only a portion of the portfolio and sells “the cream of the crap” to the group. The group then takes what they want to keep, if anything, and then marks up the rest for resale to smaller vendors. We’ve struggled to make the pricing work, but we will sometimes acquire a one-off deal from these groups. Honestly, it’s been a couple of years since I’ve purchased in this manner…but they are still out there.
As always, you have to ask yourself why the seller is willing to sell the note in the first place.
I truly hope this helps. Let me know if you hear of other ideas. I would love to hear about them.