The Non Performing Note – Part 2

The Non Performing Note

Part 2 – in our Series

“One banks trash is another banks (or note investors) treasure”…or is it?

At a recent note mastermind summit I was asked to identify the one big mistake I see new note investors make – and without a doubt the answer is paying too much and buying the wrong note secured by the wrong collateral – which leaves very little chance of making a profit.

Let me give you an overview of the non performing real estate note marketplace today as I see it, touch on a few things to look out for, and finally offer some advice and counsel on how to move your non performing real estate note buying business forward.

The Big Shark TheoryBig sharks are big for a reason. They have eaten well over the years and learned to avoid being someone else’s lunch. Beware of that hungry, bigger shark, he can smell you from a long way off and every time you stick your toe in the water, he is looking for you.  Many ~ with more enthusiasm than real estate experience and study habits/dedication to learning this business ~ get used up and spit out very quickly with at best a humbling learning experience and a negative result in their bank account.

There is a story they tell about two that got together to make an investment  – one of the two had money, the other had experience. At the end of the deal the one with the experience had the money, and the one that used to have the money had the “experience”.

The California  “Investor” Syndrome. I have many sharp real estate and note investor friends across the country in areas where they have trouble spelling the word appreciation (it is not because they are not smart enough to spell – trust me on this one – it is simply because they have never experienced this appreciation phenomenon in their markets in their lifetimes and maybe they never will)

They have been very happy to welcome these West Coast “investors” flush with cash and “instant expert levels of financial intelligence” from their rapidly appreciated California homes, and eager and enthusiastic to “invest” it in real estate and notes on properties that look very similar to the ones they live in back home in California.  They forget that these investment properties are NOT in California.

People need to realize that there are areas of the country that are in such poor economic climates that they may never recover in our lifetimes. In every city of the country there are challenged, inner city, gang infested, troubled areas, and the lists of non performing bank pools of these available notes will be full of exactly these types of properties.  As a successful note investor looking at notes on properties on a national basis you need to understand which areas to avoid or at least to price in the substantial risk associated with notes on properties in these areas.

Can you imagine a note being valued at less than zero?

A simple fact – some notes are worth less than zero – yes,

they must Pay You to take them.

I heard one major non performing note hedge fund manager state at a conference in public that when asked by a selling bank if he would buy ALL of their inventory no matter what the condition and risk of the note he replied ” I will buy anything at the right price”

I hope he meant that right price included negative numbers because the fact is that some notes are worth less than zero – keep this in mind when a non performing note pool seller offers to throw in some notes at a very low price – you might be donating these same notes to your local charity at sometime in the near future.  I wonder if it is any coincidence that this same hedge fund is now a fraction of the size it was a year ago and this same individual has been moved out to explore new adventures.

A key point to keep in mind when reviewing pools of non performing notes in today’s market is to BE VERY SELECTIVE – There are many more notes out there than you will ever be able to buy – find the good ones, the right ones for you that give you an edge (maybe in an area or product type where you have unique expertise), at the right price. Beware of “the bottom third” of these pools.

My good friend John Schaub came to visit us in San Diego this past week  – John has over 40 years of real estate and note experience and has done and seen it all.  He asked the question “what do you want to be when you grow up? –  Do you want to carry a surfboard or a gun? (If you end up with notes and real estate in the wrong areas of the country, or the wrong parts of town, it might be the latter)”

Some Closing Thoughts

Don’t buy a note (especially a non performer) on something you would not be happy to own.

Educate yourself and get the experience you need – don’t be that buyer they are looking for – and even then place small bets at the beginning and do it with funds you can afford to lose. Finally, it is a matter of perseverance. If you refuse to quit then in the long term you cannot be beaten.

To Your Prosperity,

Gordon  Moss

Quixote Ventures, Inc.