Last week I talked about not getting in your own way and sabotaging your deals. But this week I want to talk about the flip side of that, which is that you need to understand your pricing model and not be tempted to stray too far away from it.
Right now there seem to be a lot of note sellers with insane pricing expectations. Some of the crazy expectations I’ve run into lately include:
- Pricing at par or even above for non-performing notes
- Wanting pricing based on the full payoff versus the unpaid balance
It should be pretty obvious why you can’t pay par, or anywhere close to that, for a non-performing note. You are basically just hoping to get your money back. I spoke with a seller earlier this week who explained that they are in a very unique niche of the sub-prime market, and that the sub-prime loans they generate are so good that they almost never go bad, and even when they do they are still worth par+ because of the favorable terms and how they scrubbed the borrowers. The story didn’t make any sense to me on many levels, so rather than poke at their story I just moved on….
The request to price based on the payoff amount is slightly more reasonable, but I still won’t do it. Remember the difference between the unpaid balance and the payoff amount includes the past due interest, late fees, charges for unpaid taxes and insurance, and potentially a lot of other things. But in some cases those might not be considered collectible, especially if the prior servicer didn’t keep clean records of everything. That amount is also what gives me room to maneuver when working out a deal with the borrower. If I’ve bought based on the payoff then I may not be able to afford to do a loan mod and might have to foreclose just to get my money back. I always hate to have my options limited.
I’ll add that I’m not aware of anyone actually paying these ridiculous pricing levels. It seems that for the most part when these assets hit the market they just end up not trading. I’m not sure why these sellers are even bothering since it seems like a waste of everyone’s time. Maybe their just taking a flyer in case someone comes along and bites and then they can hit a jackpot? I don’t know. I do know that when I’ve sold some of my own notes in recent months, I didn’t run across any buyers offering to pay ultra-premium pricing.
So as you bid on notes, do your best to maintain the balance between not being too conversative, and also not being induced to pay at pricing levels that don’t make any sense. Its simple to write but of course in practice its easier said than done 🙂