I’ll open this post with a warning…
Dealing with people who represent themselves as sellers and aren’t actually the owners of bulk REO (“Real Estate Owned”) and non-performing loan assets will waste your precious time and will only discourage you from really making money.
That’s why I’m sharing with you the 6 key questions every bulk REO seller must be able to answer to ensure you will close the trade and get paid.
This post isn’t for the light hearted — in fact, it will not make me many friends. I don’t care. That’s what “Facebook” is for. Right?
The real estate gurus are now coming out in droves and selling you the hottest products you will find anywhere on the planet, along with false promises that you will become independently wealthy before Christmas.
Almost all of them have to do with Brokering Notes and Bulk REO Pools from banks.
While the sizzle from the bacon they are frying smells and sounds sinfully alluring, what they lack is depth.
What does this mean? It means that although the concept is solid, banks are looking to rid themselves of hot-potato mortgages now that the “ForeclosureGate” settlements have been finished and everyone was paid off.
Through the funds that I’ve managed, I’ve paid hundreds of thousands of dollars in fees. I have a friend in NYC whose fund paid one guy just over $1 million dollars in fees… for one stinkin’ trade!
What you have to understand is where these opportunities exist.
… You just need to know the key questions to ask to cut through the clutter and find them.
This brings us to the 6 questions that you must ask every seller of Bulk REO and Non-Performing Loans (“NPL’s”). This will save you heartache, frustration, and most importantly, your time.
You can never get your lost and wasted time back.
Here we go…
Question #1: Are You the Owner of These Assets?
I know what you’re thinking here.
But hold on.
This is the same vein of question that a parent would ask of a child they already know has done something bad and is actually giving that child a chance to come clean.
“Yes, I know someone gave your sister a haircut with my gardening sheers, but was that you?” In that kind of way.
Naturally, they will say yes or some other convoluted answer. If they say yes, then we’ll proceed to Question #2.
Question #2: What Are Your Pricing Expectations?
Any seller should know beyond the shadow of a doubt what their asking price is for a pool of assets. They have a minimum bid that they will take.
Folks who aren’t in control of these assets or don’t really own them will say “just make an offer”.
That’s not going to work. When a trader puts together a bid, they “hang a number” on each asset.
It requires a lot of work and if the seller doesn’t quote them their pricing expectations in a range (for example, 60-65% of current market value), then that trader isn’t going to want to deal with it.
Why is this so important?
Well, at the end of the quarter and almost always at the end of the fiscal year (which for most banks and financial institutions is the end of November), banks will want to mark their books, which means they will want to just see what the market would offer for their assets without committing to selling them.
This is no different than you placing your house on the market with a realtor just to get offers, so that you can find out how much your house is worth without intending to actually sell it.
So, in essence, your buyer is working for free.
Would you work for free? I didn’t think so; otherwise, you wouldn’t be here.
(Note: If ever someone tells you a range, and you know it’s from an institution, get that in writing.)
Because if their asking bid is “hit” by your buyer, then you’ll have something to fall back on if they renege.
And some institutions will renege. That is the power of email.
Question #3: Are You Selling These “Servicing or Servicing-Released”?
Let me let you in on a dirty, filthy little secret…
Servicing companies make a lot of money servicing loans. A lot.
How about a 4% servicing fee for defaulted loans alone?
This is also why most short sales never have a chance of going through to closing without the bank or servicing company reneging on it.
Can you see why it doesn’t make sense for a servicing company (in the case of defaulted note servicers, “special servicers”) or banks with their own servicing companies, to accept your short sale offers or counter at some ridiculous amount that results in most real estate investors just walking away?
However, for the guy or gal on the other side of the phone with a Gmail.com email address or who found you on Facebook or LinkedIn, they’re not going to be likely to know what servicing means and they will stumble.
Any bank or institutional seller will tell you that they know whether they will sell these assets with or without servicing.
If you made it this far and they’ve not hit all the high notes, then it’s time to cut the bait.
If you’re interested in getting more experience, then perhaps you can still keep them on the line and ask the next slew of questions…
(NOTE: Want access to my business vault? Right now I’m offering access to my systems, strategies, templates, trainings, and recordings. It’s all included in The Investor’s Syndicate, and is available to you here.)
Question #4: What is The Average UPD (Unpaid Principal Balance)?
Know your deal.
It’s a reflection of how credible you are and your intelligence.
You’re not going to buy something without knowing exactly what you’re getting with it, right?
Do you think that an institutional or experienced buyer is going to blindly bid on something without knowing what the contents are?
You’ve got to step up your game here and know what you’re trying to sell. Merely hitting the forward button to anyone and everyone you know who may be a buyer is not going to get you anywhere.
The buyer holds the gold and makes all the rules. He’s not going to pay you 1-2% on a trade merely for hitting the forward button.
Same goes for your seller.
Ask him if he knows what the average unpaid principal balance (“UPB”) is for this pool. That’s principal spelled with “pal”, as in “Sal is your Pal!”
Not only is this question a litmus test to determine if they are the owner or not, but not all buyers are interested in all things.
Just a little FYI here: You need to be smart and, actually, if you’re a seasoned pro like me, provide “pricing improvement” to your buyer.
For example, “Bank of Topeka stated that they’re looking for a range of between 60-63% of the UPB, but I told them that the market is paying between 58-61% on these assets so they may be a seller in this range.”
Now that’s rich!
Would that fit better under question # 2?
Some guys like blondes; some prefer brunettes, others go for redheads.
If the average unpaid principal balance (“UPB”) on these loans is, say, $50,000, then that is really “rough product” and most of your buyers won’t want to bid on that type of junker house.
If the average UPB is too high, well, some of your buyers might not want the deal.
Luxury homes, despite what many other gurus will tell you, don’t move fast because there’s only a finite amount of folks that can afford them and qualify for the financing. And these luxury home buyers are incredibly picky, too.
These homes often are behind big gates with very demanding and Draconian HOAs that prohibit any sort of mass selling events such as an auction or herds of people bidding on the house.
Now you’re getting it…
Question #5: How Do You Want Us To Bid?
Let me tell you how bids are managed between legitimate buyers and sellers.
They are almost always institutional — meaning a private equity fund, perhaps a smaller pension fund with less than $3 million in assets under management, a family office, or even some hard money lenders who buy defaulted notes.
Usually, bids for residential REOs and NPLs follow these similar methods:
First, a seller and a buyer will agree that the seller’s pricing expectations are “in-line” with what the buyer thinks he would bid for this portfolio.
The buyer then prepares what is called an indicative bid, which means that his bid is going to just be done from a desktop analysis using Zillow estimates and perhaps another tool called an Automatic Valuation Model (“AVM”).
An AVM is nothing more than a service that uses mathematical modeling to value properties. Wall Street firms use this type of model to value residential properties.
While these models are quick and cheap, they do not factor in the condition of the property to determine its value.
That is why we call this an indicative bid.
Next, if the values that came back from the AVM or desktop analysis didn’t “fade”, then the buyer goes on to prepare the final bid.
The final bid is where the buyer will start their own due diligence that will take money out of their pocket upfront. These hard costs will be used to get Broker Price Opinions (“BPOs”) done on each property, do title searches and such.
Then, and only then, will a closing occur and funds will be transferred upon receipt of the collateral or original documentation for each loan.
The original documents will be the ones with the blue ink on them signed by the borrower. Servicing records will be given to the buyer and then the trade has settled.
The time it takes to do this?
Well, we’ve closed a pool of loans under a tight timeframe in about 3 weeks. So when you hear this line of bull: “Seller needs to close by a week from today!”, you’ll know who you’re dealing with right away.
So now that we’ve gotten this out of the way, let’s proceed to tell you how these are or are not done.
There are many, but I’ll speak to the most common.
The “Mail Order Russian Bride” Scenario
We all know how this works.
Some desperate sucker from Nowhere, America finds a young and attractive beauty online.
They chat and he exposes his most intimate and deepest heartfelt desires. Before you know it, the blonde, blue-eyed Moldovan beauty arrives with her bags packed and she’s not going back.
It’s love at first sight…
They get a marriage license. He doesn’t know anything about her or her history. She could care less about him. They’re at the Justice of the Peace within hours of her landing into his hometown, and he has no idea what he’s getting into.
What does this sappy story have to do with trading Bulk REOs and NPLs?
You didn’t marry your spouse after the first date; why should a buyer be expected to commit to a deal blindly by lifting up their skirt?
Put it another way.
If anyone asks you for a Letter of Intent (“LOI”) and a Proof of Funds (“POF”) before anything is even shown to them, you’re dealing with someone who either is just looking to see who your funding source is and will then go around you, or they are just being told by someone in their Daisy Chain that this is what the seller needs.
The Mail Order Russian Bride Technique will almost always lead to dead-ends, frustration and emptied wallets. Just like on Dateline…
The “Packing The Deal” Scheme
No doubt, you will have seen this already.
Someone comes to you. They are looking to broker the deal to you and you ask them what they are looking for. Their answer?
“54 + 4%”
No. Sorry, Boobie.
That’s not how it works. No one is going to pay 4 points on a deal on top of what the asking bid is. That’s assuming that the portfolio is even worth what they are asking.
Sometimes this will be disguised as “58”.
Then, in order to find out who the real owner is, these folks will make you sign a Non-Disclosure Agreement (“NDA”) that is littered with landmines in the form of small print obligating you to pay fees and surrender your life away through personal guarantees…you name it.
Here are some ways you can easily identify if you’re working with the seller or not.
If you’ve ever heard the shtick that Jeff Foxworthy has been doing for the past 10 years, you’ll understand what I’m trying to say here…
You Probably Aren’t Direct With The Seller If…
When You Call, You Hear Babies Crying and Dogs Barking in the Background
Think about the last time you called a bank or another financial institution and heard these very sounds in the background.
Nope, I can’t recall that either.
Their Email Address is Cheap and Cheesy.
Examples: firstname.lastname@example.org; Getmoneytoday@gmail.com; Ibuyreos@yahoo.com
These are the most obvious, but they’re also the most pathetic.
In my opinion, these folks aren’t interested in building a credible “storefront” and are even insulting your intelligence by emailing you assets that they are stating they own or control.
Their Email Signature Has a Picture of Them.
Headshots are for Realtors and Realtors cater to the retail investor crowd. Sorry. Save it for Match.com.
They Have Quotes of Dead Persons on the Signature Line.
I don’t think I really need to tell you how unprofessional this is.
I once worked with a broker who used quotes from Jimmy Buffet and the Grateful Dead on his yahoo.com email address.
Only made me think that when he wasn’t responsive to my bids he was too busy burning one down in his basement…
They Use Emoticons.
Silly. Stupid. Not professional.
They Have More Misspellings Than a 2nd Grader in Their Emails.
One of the principle reasons why Bill Gates is able to give away $1 million dollars via email to the next 100 people you forward this to (or there will be an immediate mass execution of newborn puppies) is because Bill provided a solution to what embarrasses millions of Americans today.
Today, spell check has been successfully integrated into every word processing program and email client. There simply isn’t any excuse for misspelling words except for being lazy. Use it or lose the bid. And the same goes with your credibility.
They Call, Text, and Email You Every Day Looking to Find Out When The Deal Will Close.
Wall Street culture, especially on Friday’s during the summer, is that the workday ends (unofficially) at 2pm. Nothing is going to get priced or done on a Friday at 5pm Eastern. No.
When I was running my $30 million fund, brokers would call up and say they needed a bid and a LOI and a POF by 5pm that Friday (mind you, this was a Thursday and I was already en route out “east” for the weekend) and had to close the following Tuesday.
That Monday also happened to be Memorial Day.
Now, if I was green (and I hope you’re paying attention here), I probably would have worked all weekend to get this broker his demands but, being the playmaker, I told him that nothing in this business couldn’t wait until next week.
Nobody was going to go to jail or get hurt. It was OK.
By the way, he wasn’t direct and was simply being led on by another broker. The deal was a dud and once I proved this to him, I never heard from him again.
Their Email Signatures are 10 Lines Long With Links and Advertisements For:
- Pre-Paid Legal Services
- ACAI Berry Health Juices
- Or any other multi-level marketing business
Nothing screams desperation more than one person putting multiple affiliate links to products that have nothing to do with the Real Estate business in his or her email signature.
It’s pathetic and it instantly makes you look desperate and foolish.
If you do participate, use a separate email address and be sure to keep these mutual businesses “church and state”.
All Assets are “Performing”; However, the Last Paid-Thru Date was 6 Months Ago.
This is the equivalent of having the cashier tell you that the bottle of milk is still good for you to buy — never mind the expiration date shows it’s one month past its sell-by date.
If you look on the asset tape, there should be a “Paid Thru” column on the Excel spreadsheet that states when each of these loans has been paid through to.
So if this is October, there should be a date of “October 1”, “October 2” on there stating this is when the last payment was received…
If you see “August 15”, or “July 1”, then you know this is a non-performing note. Regardless of what I am told, without an updated tape, I will, and so will other bidders, assume that these are non-performing and will price these assets accordingly.
If I buy an asset I was told was performing and I give a performing bid on it, I am paying a fair price for this.
If it is really non-performing, then investors such as I will scorch the earth — going back to Moses — suing everyone who was involved in the trade for malfeasance and misleading the facts.
Ask me how I know this.
Never ever change the “Paid Thru” dates on an Asset Tape. Never. OK?
They Send an Email Blast Not Using BCC.
Novice move. Don’t ever do this as it makes you look like you’re older than dirt and don’t know how to use “the computers” very well.
They Want to do a Conference Call With You at The Drop of a Hat.
The only folks who want conference calls are other brokers in the Daisy Chain.
They Want a Fee Agreement Before Sending You Anything.
Fee agreements don’t come into the picture at any time before the indicative bids are made.
Anyone asking for a fee agreement to be signed prior to sending information is looking to hoodwink you into something that…
- Probably won’t close because it’s not a deal anyway.
- Will put you into harm’s way if the deal does or doesn’t close.
These fee agreements make the Terms of Service on Facebook look innocent by comparison.
“Do You Trust This Person With Your Wallet?”
It all comes down to your gut.
Or, if you don’t have a gut, borrow your spouse’s!
I think women have a better gut instinct and, if I’d listened to my wife when she warned me about hiring or doing business with certain folks, I’d be hundreds of thousands of dollars richer.
Where does this question come from?
When I was working on Wall Street, I started out as an Analyst. Analysts are like high school freshman on the school bus.
They’ve been hazed, beaten and abused.
But sooner or later, all Analysts (if they are good, strong performers) are promoted to Associate. This means that the newly minted sophomore is now in the enviable position to interview new Analysts.
After doing a bunch of round robin interviews on a Thursday afternoon for recent or soon to be grads of Ivy League colleges and universities, the Associates would be responsible for providing their thoughts on each one of the candidates.
This was a very competitive and sought after job; after all, and at least at the firm where I was, they made sure that each candidate that was being considered would actually fit the firm’s culture and would work well with others.
I vividly remember my boss at the time challenging me on one candidate.
This young man looked perfect on paper. Straight A’s from Wharton. Some professional experience at a smaller brokerage in Philadelphia.
And even the “token” volunteer experience in a third world country helping the unfortunate.
Looking back, I was quite green at the time. I thought he would be a good fit. He would learn easily and was driven to excel. My peers thought there was something there they couldn’t place. One colleague called the guy “slippery” and “more like a politician”.
During this time, my boss looked at me deadpan and asked:
“So, Sal, would you trust this person with your wallet?”
And that was the question that I never forgot.
I was forced to dig deep into my gut and to answer “no.” Sure enough, this was one of the better experiences I would never forget and has proven time and again to have been very helpful for me to make tough decisions.
Daisy Chains Don’t Close
“I am direct with the person who has the seller’s mandate”.
This is crap.
This means you’re in a daisy chain and it’s the proverbial blind leading the blind.
A daisy chain is when one Bulk REO broker takes a pool of loans to another broker, who then tries to take that pool of loans to a legitimate buyer.
There are a number of reasons why daisy chains don’t close:
- The loan fees quickly get excessive.
The first broker tries to charge a point. Then the second broker adds two more points. (Often a third broker tries to add another point or two.) The seller will allow for 1 or 2 points to be paid.
Pretty soon you’re trying to sell the buyer on paying six to seven points.
Folks, in real life, sellers of bulk assets never sit still for packing (a pool that gets packed with excessive fees).
- Communication gets garbled. Do you remember that game we used to play in the first grade? Seven people stand in a line.
The first kid whispers a phrase into the ear of the second kid: “Eddie kissed Lucy as she sat on a stool.” The second kid whispers the message into the ear of the third kid … and so on.
By the time the message reaches the seventh person in line, the message has been grossly distorted: “Eddie and Lucy both got loose stools from kissing.”
Buyers can tell when a deal is involved in a daisy chain. They quickly get irritated and turn the deal down.
- Most daisy chains involve the blind leading the blind. One of the first lessons that everyone learns in this business is that daisy chains don’t close.
This means that if another broker is willing to let you stay in the loop and add a point or two to the deal, then that second broker is obviously a complete rookie, too!
Rookies don’t have special, four-year relationships with some special assets manager at a major bank like Bank of America — the type of relationship it often takes to actually close Bulk REO and NPL trades.
If you’re involved in a daisy chain right now, you may still be in denial. Don’t worry about it. You’ll eventually discover for yourself that daisy chains don’t close. We all learn that lesson.
This brings me to my next topic….
The Networking Myth
You can find a lot of individual residential deals to rehab and flip at REIAs and real estate seminars.
However, when it comes to all things Bulk REO and NPL related, these conferences are full of no one but blind mice.
These are rookies and novices who will tell you they have access to someone who is the head of Bank of America, Wells Fargo, or (insert the name of any lender or bank that advertises during halftime at the Super Bowl)… and can deliver hundreds of millions, no… wait for it… billions of dollars’ worth of Bulk REO and NPLs.
Then you get the NDA, Fee Agreement and LOI and all that nonsense and foolishness that will get you nowhere.
The good news is that you’re now smarter than the rest and won’t get tied up into this mess.
Make me proud, please!
Let me ask you a question: Why do these banks need you or your investor friend who is a part-time real estate investor to move a $30 million dollar Bulk REO portfolio?
Do they think that no one else is capable but a housewife in suburban Ohio sitting in her basement next to her hot water heater using her email@example.com email address to move this?
How It Really Works
If you have a direct contact with institutional buyers or wealthy guys that buy this stuff and you know that they do have the money and the experience to buy these, then that’s all you need.
As much as I hate to say it, most of these folks are either in Manhattan or Southern California.
Topeka, Kansas isn’t the financial epicenter of the world. New Orleans is the Bachelor Party Capital of the United States.
Are you catching my drift?
Also, networking is fine as long as you go to what I call the “Grownup Conferences”.
These are not your seminar “pitch fests” with many speakers hawking their home study CDs and Tapes. No.
These are industry conferences that the real movers and shakers go to; all the lenders and banks that specialize in this business.
I personally have gone to many and I just loiter in the bar area of the hotel exchanging business cards and using my elevator pitch.
My goal out of every event is to get a 1 and 1⁄2 inch thick stack of business cards from the other folks and so should yours.
You’d be surprised how many people want to talk to you and network if they hear that you are talking their language. (And if you’re still reading, then you’re pretty fluent).
I pre-arrange to meet with folks for breakfast, lunch and dinner and go to the after parties with them. It’s an incredible blast and a lot of fun.
And most of them can be found going to the Mortgage Bankers Association website.
This business is too big to really deal with folks who are clueless. You can make a lot of money as I’ve stated before by just rubbing elbows and drinking martini’s with the right people.
Who To Target
I know you’re thinking…
“Great, you’ve showed me how to find buyers and you told me who I shouldn’t be working with. But what about the sellers? Where are the sellers, Sal?”
Tell me if you agree that you’d much rather be using LinkedIn to connect with three or four real guys and gals rather than 4,000 flakes who don’t know what they are doing?
The folks you’ll want to focus on and networking with are those individuals who work in the loan departments of smaller, regional community banks.
The types that don’t advertise during half time during the Super Bowl…
These are the ones that are neglected and need your help. Provided you know what you’re doing. Where do you find these? By going to the FDIC.gov website.
The Owner Carry Back Mortgage Myth
It is true you’ll hear a lot of speak about how you can buy notes from individual note sellers. These are ma’-n-pa’ investors who have sold a property and have decided to take a note back.
In the old days, usually the only way agricultural land such as farms would trade would be via the seller carrying back a note with principal and interest not being paid to the bank, but to the seller.
The seller, in essence, would become the bank. (Gosh, I love that concept!!!)
Fast forward to today, and more and more sellers are opting to sell their property and take back a note.
The reasons are simple: banks aren’t lending anymore and aren’t likely to anytime soon unless your buyer has credit better than most other humans on Earth.
It’s also because they realize that they can make more interest income selling a property and taking back a note than they can putting that cash into a bank savings account.
After all, look at the alternatives. There really aren’t many out there.
Now I want you to think about what I’m going to say.
Since the horrific events of September 11, 2001, interest rates have been artificially held at around 1%. This effectively screws savers and turns them into losers.
Again, you don’t need me to point out the obvious here.
What should be obvious to you is why would any note holder who has taken a note back at 6%, 7%, maybe even 11%, ever want to sell this note to you at all, much less at a discount?
Does this make sense?
Do you think that a seller will look at the alternatives in (what I believe to be) an artificially inflated stock market or dirt low interest rates for savings accounts that pay close to nothing?
If someone sold a property for $200,000 to a shaky credit buyer and took back a note at 7.5% interest for 30 years, why the hell would that seller want to sell the note to you at a discount?
Using interest only here, that 7.5% interest rate equates to $1,250 per month.
If that same person were to invest that $200,000 in a bank, assuming that he took it all in cash, at the rate Ally is offering at 0.95%, then that seller, who is now a loser because he’s losing money, and a lot of it, is only making $158 per month.
That’s about a month’s supply of dog food and I hope he or she likes kibble because that is all they are going to be able to afford to eat.
Welcome to retirement, folks! You’re all invited!
Everyone ‘round the world! If the house burns down, it is insured. If the bank goes belly up, (a la MF Global), he is now wiped out. He is not secured. This is Finance 101. This is common sense.
Unless the seller of that carry back note is forced to sell that note via a divorce decree or has had something else that is really bad happen to him, you’re going to have to pry that note away from most sellers’ cold, dead hands.
Again, this is based on my 17 years of experience trading these things, so what do I know?
Question #6: Where Can I Access Copies of The Collateral?
This question will make even the hardest working rookie stumble and stutter: “What is collateral?”
Banks and lenders store their collateral, and any buyer that enters into an agreement to purchase assets is allowed to review the collateral. This includes all of the original documentation and, if the lender knew what they were doing, is usually as thick as the Yellow Pages in a small town.
(Most private lenders don’t, and that is a whole other opportunity called “Document Deficiency” that we won’t get into here.)
Digital images of these documents are usually kept behind a password protected site or can be mailed usually via FedEx to the buyer on a CD-ROM.
If you really think that your seller is the owner or has control of this and you ask him this question, it’s sort of like asking any parent where their young child is…
They all know.
So, here we are. Go ahead and give this entire post a read again and let me know if you have any questions.
Better yet, join me in The Investors Syndicate. It’s full of the brightest minds in the game, including access to yours truly. See you in the winner’s circle!