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Sticking To Your Model

Everyone has their own model for their notes business, but there are numerous opportunities to stray from it. I focus on 1st liens on single family residences, in specific states, in a specific value range. I also want to have some indications that the borrower may re-perform or agree to a modification that will allow them to reinstate. At times you will be tempted to stray from your model, but I think its important to focus on what you understand best and are most comfortable with to prevent problems in the long run.

This past week I was tempted to go a little outside of my model. After being on Scott Carson’s podcast the other week, I have had no shortage of available funding partners. The JV deals I had available got taken rather quickly, I have a couple other partners lined up, and I have been on the hunt for more assets. But I was having trouble finding assets that fit my model. I had a tape with some decent assets, but they hadn’t seen a payment for quite a while and were very past due, longer than the range I typically work with. At the right price these would be good deals, but I decided not to bid them for a couple of reasons:

  1. These were much more likely to end up in a foreclosure scenario vs a re-perform / mod scenario
  2. Given how far behind these loans were, there was a higher probability than normal that there would be damage / issues with the homes in the event I took them back in a foreclosure
  3. They had a lot of back taxes and other liens due
All this added up to a likely outcome of lower ROI’s and longer timelines for my funding partners, and other potential “unknown unknown’s” popping up.

Recently I was able to tell a JV partner that their 2 loans had started performing again and became current (without a forbearance agreement). I was able to tell 2 other partners that the borrowers were open to a forbearance agreement and we had tentatively agreed to deals to get them current. I like being able to have conversations like that and want to have more of them. These outcomes were less likely with the assets that I was looking at this week.

I can’t say I wasn’t strongly tempted to go outside of my model, but I think I made the right decision and it will save me headaches and give my partners better returns in the long run. Fortunately, not long after starting this post I received a tape with assets that are more inside my wheelhouse. I will work on these over the next week and hopefully have some new assets soon.