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What does it take to become a good note seller? In this episode, Dan Deppen talks about how to be one and also how to recognize them when you are the buyer. Some sellers you run into will turn out to be crooks. Some will have problems with their notes because they are disorganized. Others have everything put together. Dan covers some key things to watch out for, and the red flags that could indicate the person trying to sell you a note is a crook.

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Being A Good Note Seller

In this episode, I’m going to talk about how to be a good note seller. Also, when you’re buying, what to look for in a note seller? There are many different types, some good, some not so good. We’re starting to get a little bit at the home stretch of the year already even though it’s September 2020. We’ll soon be in the fourth quarter. A lot of people will tell you that more note inventory hits the market in the fourth quarter. Some years I have found that to be true, other years not so much. This year with COVID and all the general insanity surrounding 2020, God only knows what 2020 is going to look like.

I want to start teeing you folks up to take advantage of if deals do show up at the end of the year. Some of the note trading that’s been going on has been tamped down. No trading has been less active than what it would normally be so it seems like there’s a possibility that things could loosen up at the end of 2020. That’s most likely is going to be the case. 2020 is a wacky year so nothing might happen in the fourth quarter and the opportunities come later. I want folks to be ready if the opportunities show up and revealed themselves. I’m going to be doing a few different things.

Some of it is this show to let people know what to look for in sellers because there are some bad actors out there lurking in the industry. I’m also adding some content to my due diligence online training course, Systematic Due Diligence, and I’m not going to re-launch that in a way. I’m not changing the pricing or changing the core offering too much but I’m adding some additional content that will be helpful as we get into the end of 2020, some other bonuses, and things as well. Stay tuned for that. That’ll be coming out. Now, let’s talk about being a good note seller.

I like to put things into buckets if you’ve been following this for a while, you can’t tell that. I’d say there are crooks, disorganized people, and then the good note sellers. The crooks are the people who will try to sell you a bad note, who would rob you and take money directly from your bank account if they could. The disorganized people are the people who aren’t bad people but because they don’t keep their stuff straight, it can post problems when you try to buy a note from them and there can be a lot of extra due diligence things you need to check on. There’s the Mary Poppins’ good note seller’s practically perfect in every way, which the reality is no one is because notes are complicated and things happen. I’ll get into that.

The Crooks

I first started by talking about the crooks and this is something to watch out for especially if you’re new to the note business. There are a number of people who will show up and try to sell you a bad loan. They will specifically often try to target people who are new to the industry and aren’t going to catch some obvious laws. We’re in the aspects of loans that the crooks will try to offload onto you or notes with fatal title flaws where you’re not going to be able to get clean title to the property. The other thing is quite popular. You see a lot of stale loans where the loan might be 10 or 8 years behind. Sometimes, it might be beyond the statute of limitations where it’s not even enforceable and you can’t foreclose on it.

Oftentimes, they’ll try to sell notes on properties that are trashed. I haven’t seen this one myself but I know other people who have got offers accepted on notes, looked into, find out that the property was a demo, and there was no house. It was an empty lot. Delinquent taxes are common and having delinquent taxes is not necessarily a bad thing but sometimes there are large amounts of delinquent taxes. A lot of times the crooks will show up with loans where the borrower has made a payment in eight years, they haven’t paid the taxes, and it’s overdue to go to tax sale. You’re hoping you don’t notice that. If you don’t then you could buy the note and then lose the property right away.

In some cases, they’ll try to sell notes that are already lost at tax sale. My big pet peeve, the other one you run into is the pricing they ask for. They will often ask for pricing that doesn’t make any sense. One of the big ones which are a red flag is that they’ll try to tell you that there’s a lot of equity in this note even though the unpaid balance is $30,000, the property is worth $100,000 so I’m going to price it based on that $100,000. You can scoop that equity when you foreclose. Forfeiture is a little different. If that house is worth $100,000, it sells for $100,000, and your pay off amount is $30,000, you’re getting $30,000 you can’t collect more than the payoff amount there. Everybody knows this that’s been around. If someone is claiming that they’re a reputable seller and they’re insisting that it works the other way around, that’s a bad sign.

Some other red flags to watch for are when they have a loan that hasn’t been paid for a long time, might be six years delinquent and they try to tell you, “This will be easy for you to handle. You can foreclose.” This is a non-judicial state and it’s fast but yet they haven’t done it themselves and no one else has done it. If you have a loan that sat stale and no one’s done anything with it, there’s often a reason. That reason could be that there’s a fatal title flaw that they can’t fix so they can’t do it, the statute of limitations has run out and they can’t proceed with that foreclosure, or the property is trashed, it’s not even worth the legal fees to go through the foreclosure.

There’s generally a reason. I have found loans sometimes in larger funds where if you’ve got a fund that’s got hundreds and thousands of loans, some of them can get lost in the shuffle where they’re aware of it but they don’t have time to deal with it because they’re dealing with other aspects of their portfolio. That can be the case sometimes but this means something is wrong. Another red flag is when you find some obvious problems that they didn’t disclose. For example, there are $12,000 in delinquent taxes on this property or this property was already lost at a tax sale. I see these things all the time.

If they say anything else, I gave the example of when a seller tries to say that you can collect all the equity at a Sheriff’s sale, sometimes he says other things that don’t make any sense and pass the sniff test. The other general thing to watch out for is unreasonable pricing asks. People asking for 100% of UPB or even higher in some cases. There are loans that exist in the market that can sell at that price but they’re generally not the loans that we see and there’s definitely not some $100,000 nonperforming type stuff. The other thing is you also want to make sure that the person you’re dealing with owns the loan.

If you look up who owns the loan and it’s not them or they don’t have a story for what it is, that’s always a red flag as well. In my due diligence course, I go into detail showing how to pull that up. That’s a topic I can cover on the show as well at another time. Another red flag is when they send you a tape and the data is stale. If they’re sending you a tape and the data was last updated six months ago or even longer, sometimes that means they don’t own the loan. The tapes being passed around or they do loan it, they put this together six months ago, they sent it out, the assets were fatally flawed, and no one bought them.

They’re taking a flyer, “I’ll send it to this person, and they’ll make me an offer.” The other big one that you see commonly is when they claim BPO values that make no sense, whatsoever. No matter who the seller is, you always want to verify the BPO value yourself. Get eyes on the property at the time you’re selling even if it’s a credible seller. They may have bought the note two years ago and the property may have been in good shape that could have changed since then. They may not even know, potentially. You always want to get your own BPO values. However, if they’re trying to tell you that a property is worth $125,000 and Zillow says it’s worth $50,000, we all know Zillow tends to be high.

Something is wrong there. If they’re giving you data that doesn’t make sense, it suggests they made it up and threw it on tape. Those are some of the red flags to look out for. If you run into these, it’s possible you’re dealing with a crook. It doesn’t mean you absolutely are but it’s a possibility. There are certainly too many of them out there, especially as we get into this end of 2020 I was talking about. You often see new assets hit the market but you also tend to see a lot of that years’ recycled tape. A lot of the garbage assets that floated around during that year, all of that show up again at the end.

The Disorganized

The second bucket I put is people that are not necessarily crooks but I call them disorganized people. To me, note investing is all about being able to handle a lot of details. Not everybody either has the ability or the stomach for it. It takes a personality type to keep that stuff under control. In reality, we are all disorganized to some amount or another. I know for myself, I have let things fall through the cracks at different points and then my response to that is to update some of my standard operating procedures and processes over time. Those get better and the number of things falling through the cracks goes down over time. At the end of the day, we’re all human and this stuff does happen but some people are a lot more disorganized than others.

What you might run into if you’re trying to buy a note from someone who I would put in the disorganized bucket would be when they bought the note, they had assignments, deeds, and things that were never recorded or the borrowers got delinquent on taxes and they didn’t notice. I’ve had sellers forget to send me the hard collateral files after the sale. It’s not a big deal. You got to follow-up with them afterward and get them to send that to you. Sometimes, I run into minor title flaws that they missed when they bought the loan. It’s not that they were trying to hide a flaw or anything that other bucket of folks I was talking about. There are little things and even attorneys have different interpretations. You can run into little things, you need to work through that and get the deal closed. If they’re a good seller at a good counterparty, they’re going to work with you to get this stuff straightened out.

Good Note Sellers

What would the good note sellers look like? This is like Mary Poppins’ perfect world. Nobody is perfect on this stuff across the board. I’m not. One thing is their notes are going to tend to be cleaned. You’re not going to run into title issues, pending tax sales, and things like that. If there are issues with the note or valuation problems, they’re going to tend to point those out upfront. Part of what got me thinking about this topic is I’m in the process of getting ready to sell some notes. I’ll be listing some of them on the paper stack before or after this blog comes out.

Generally, if there are any issues with the note, the seller will hopefully be able to point those out up-front because as the seller, if there’s some issue where the borrower, let’s say they were a spotty payer, there was some hiccup in the pay history or something, you want a potential buyer to know that stuff before they make an offer. There’s no point in putting something out for sale, not disclosing an issue, and then having the buyer make an offer, you accept it, they do their due diligence, at the end yet backing out because of this issue that came up. You’d rather have all that out upfront. If anything does come up, the seller should work with you to resolve any of those issues. I had a case where there were some title issues that needed to be cleared and some other odds and ends.

I told the seller, “We’ll need to get these things cleaned up first.” He worked to get those cleaned up, he kept me in the loop, and then once all those got taken care of then we closed the sale. The other thing I’ll say is that if they’re selling a nonperformer they should be able to give some reason why they didn’t work it out themselves. They’re not necessarily going to put this on the tape but if you ask like, “What’s going on with this? What’s the story?” If they throw their arms up, that looks weird. If someone is selling a nonperformer especially if it’s nonperforming and never did anything with it that suggests something might be wrong.

However, people have great reasons to sell nonperformers all the time. Sometimes, it could be that they bought a larger pool of notes and in that pool, they had the ones that they wanted to keep in their portfolio and they wanted to work. They’re pursing off some of the other ones because it doesn’t fit their model. Part of their plan for purchasing the pool was, “We’re going to buy this pool because we care about this group of notes then we’re going to sell off this other group to help recover some of our costs.” It could be that they have an investor that they work with who wants to cash out some of their money either from a fund or it could be on an individual joint venture. It could be that they’re giving up on it because they’ve had some loans in this bucket where the borrower never quite defaults but then never quite gets consistent either and eventually say, “I’m going to cash this out and move to the next one.”

They’re not necessarily going to put the reason for selling on the tape. I don’t think it’s reasonable to always ask that but if you call them or talk to them and say, “What’s going on with this?” They should be able to have some reason. I’ve had people hunch their shoulders and going, “I don’t know, it’s for sale.” You look at it and you realize they’re getting rid of it because it’s not worth anything. The other thing is being able to provide collateral and access to the collateral files is given after an offer is made. The process is somebody sends out a tape, it’s got a certain amount of information. Sometimes the borrowers will include BPOs and occasionally O&E reports with that. For me, I send out the data on the tape and if the seller requests collateral, I’ll send it to them.

When I list things on Paperstac, I often upload the collateral because it makes these and it gives you an easy way to do that. If I’m selling something myself then it becomes this email, sanity trying to keep track of who I sent collateral to, and who I didn’t, things that. If it’s somebody that I know, they’re a credible buyer, and they say, “I’d like to see the collateral file to put together this offer.” I’ll provide them a link to that as well. If you ask about it and the seller has a hard time providing all the collateral or you’ve made an offer, they’ve accepted it, and it’s taken them a while to get you the soft copies of the files. When I say to provide the collateral, I mean providing access to the soft copies, not the hard copies, you don’t get the hard copies until you close. If they are slow to produce that or stuff is missing and you have to keep going back at them, it can be a little bit of a red flag as well.

Another thing the good note sellers will do is be able to back up or BPO value. If you’re listening on a tape, “My BPO value is X.” They should be able to provide a copy of that BPO and the date that it was pulled. It could be that their BPO is wrong because they pulled it a couple of years ago and things have changed in that neighborhood or the condition of the property has changed but they should be able to provide some data. A lot of times, I see bad sellers throw in a number that makes no sense and with no backup, I disregard that. The other thing is that the good note sellers will provide current data on the loan. One of the challenges is when you’re going to saw loans is put together a tape, you pull all the updated pay history, everything from your loan servicers portal, and fill it in.

A lot of time goes by, we might put together this tape but then you’re waiting to get data on other loans. A few days go by before you get all the data together, you send it out, you get some offers, and then a seller backs out, so you put it back out on the market. A few weeks have gone by, you got to go back to the loan servicers portal and update anything because payments come in by then or something has changed. From the seller perspective, it’s a pain in the butt to keep up with some of that. I do see a lot of tapes where the date is a couple of months old and that’s no good especially if it’s a performing note or close to performing note and having up-to-date pay history matters.

If someone is expecting you to make offers and close on things where the data they’re giving you is three months old, that’s not great. I have seen credible note sellers do that because they were lazy or whatever but ideally, they’ll be able to give you up-to-date information. In general too, they should be able to communicate well. That’s a broad term but what I mean by communicating well is they get back to you in a reasonable amount of time, typically 24 hours. I don’t expect somebody to be on their email all day and respond to me within an hour but I expect them to get back to me within the next business day. If I ask a couple of questions where there a couple of points in the email, they respond to all of them.

It gets into a broader conflict of email and how do you use email. As time goes on, I hate email more and more so I try to consolidate it. If I have a couple of different issues that I’m discussing with someone, I’ll try to contain all of them in the same email with bullet points or something to consolidate. Instead of having five email threads with the person, I can have one. I’ve worked with some people in the past, whatever happens, they’ll respond to you one thing at a time. That’s a pain in the butt and then things get lost in the shuffle. You’re being able to communicate well is good. For me, as I’ve become busier over the years, my speed of response has slowed down as I’ve gone to work on my email in batches 1 or 2 times a day and sometimes once a day.

Apologies the folks if you’ve contacted me on stuff, I’ve been a little slow to get back at times. Hopefully, they’re answering it. I expect them to answer in a reasonable amount of time and cover the points so we can make meaningful progress. The other point for good note sellers that if they accept an offer that they honor it even if a higher offer comes in later. I have had this happen before where I accepted an offer and then 30 minutes later, I’ve got an offer, accepted it, and then soon after accepting it, I get a higher offer come in. You always have to honor it in that case because there are people in the industry who don’t do that. There’s one guy in particular who’s famous for this.

I haven’t bought any notes from him partly because of his reputation. The story on this one particular person was he would pull a note out from under his grandmother and somebody offered $0.10 more. Reputation is important that follows you. If you are selling and you accept an offer, you need to honor it for sure. If you accept it, a higher offer comes in. The first person that starts being pokey and getting flaky because there are a lot of flaky buyers, I’m okay with pushing them to say, “Are we doing this or not? I do have another offer.” That’s okay but you always got to honor it.

The other thing is good note sellers will help the borrower out afterward if they need something. I have had some cases where there were issues with the way assignments initially got drafted where you had to change a little thing. I needed a seller to re-execute an assignment. Most of the sellers are good about that. In fact, I did this for someone else. It doesn’t come up that often but sometimes it does but you don’t want a seller that’s going to throw their hands up and say, “I got the money wired. See you later.” That’s no good. Those are some of the things that the good note sellers are going to do. To wrap this up like Jerry Springer, I’ll give you my final thoughts on this.

Hopefully, when it comes to note investing, you’re playing a long game and plan on sticking around the industry for a while or a couple of decades. When you’re buying, selling, and transacting with other folks, it’s always important to consider your long-term reputation because there are opportunities to take shortcuts. Unfortunately, a lot of people try to take them. One of the nice things about notes is it is a relatively small industry or a small number of people who tend to talk to each other so you can get information on who those folks are.

Make sure you’re playing a long game, you should do well. That wraps up this episode. I hope that was helpful. If you got any questions, other things, or ideas for future topics, always feel free to reach out. I always encouraged people to subscribe to my YouTube channel at www.YouTube.com/fusionnotes. We’re getting a steady flow of new subscribers and that’s great. I’m getting closer to hitting some key thresholds that allow me to do some cool things with the YouTube channel. Thanks and I will see you next time.

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