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I like to think of the note buying process in a similar to way to a sales funnel process. If you aren’t familiar with what a sales funnel is, they typically look something like this:

I’m a product manager at an enterprise software company, and our sales and marketing organizations use a model like this to figure out how many leads they need to generate to close on a certain amount of sales. Basically, your market has some size. You can create awareness among some percentage of the total buyers in that market. A subset of those buyers will show interest, the rest will “drop out of the funnel”. Of those who showed interest, another subset will evaluate the product and consider purchasing. Finally, another subset will actually follow through with a purchase. Overall you start with a very large number of potential customers and usually end up with a small percentage of those who purchased your product. Over time you can start to figure out what percentage drop out of the funnel at every stage. If that is understood you can then figure out how many leads you need going into the top of the funnel to hit your sales target at the bottom. People like me can then do things to improve the percentage of prospects who stay in the funnel at each stage so that the funnel is “less leaky”.

Applying the Sales Funnel Model to Note Buying

So how does this apply to note buying? After all, buying notes for your portfolio is not the same as selling enterprise software or some other product. I use this model to understand if I have enough access to tapes, and if I am getting the right tapes. My note buying funnel looks something like this:

Total number of assets on tapes received
-This one is pretty self explanatory

Number of assets that passed initial filters
-These are assets located in the states I’ll buy in, meet my BPO range, have loan balances that aren’t very small, and range of other factors that can be quickly and easily filtered in a spreadsheet

Number of assets that passed initial due diligence
-After my initial filtering I take a deeper look at the assets using publicly available information including photos, crime data, tax information, and other things

Number of assets I placed bids on
-After the initial due diligence I look at the assets that are left and decide which ones I want to place bids on. At this point I am focused on pricing analysis and running everything through my ROI calculator. I’m also looking at a number of qualitative factors. Which assets show the highest pride of ownership? Which ones are in areas where I already have a team of realtors and attorneys in place?

Number of bids accepted
-Most bids don’t get accepted. If they do you could be bidding too high. Or you have a good relationship with the seller and you both are in alignment with pricing expectations.

Notes closed
-But you aren’t close to done when a bid is accepted. This where I’ll get a BPO, an O&E report from Pro Title, have a doc review completed, and dive into other details. Sometimes issues show up with the property value or the title and I can’t proceed with closing. At the end of the day, the number of good note deals you are closed on is the number that really matters.

You should always begin with the end in mind, so this process starts with deciding how many assets you want to close on and in what time frame. From there you can keep track of how many tapes you are getting, how many pass your filters, and how successful your bidding process is. I am in a phase where I am continually looking for new sources to add notes to the top of my funnel. I am also adjusting my filters and pricing model on an almost weekly basis. These will sharpen as I develop more sources and will also adjust over time to adapt as market conditions change.

Some Actual Numbers

Here are some numbers from my note buying funnel last week. I looked at a couple different tapes and then placed bids.

Total number of non-performing assets on tapes I received: 811
Number of assets that passed initial due diligence: 30
Number of assets I placed bids on: 11 (2 different sellers)

In the next week or two I’ll find out how many of these 11 bids were accepted and of those how many I can close on. Over the long run with 11 bids I would expect to close on ~2 on average. But often when submitting multiple bids to a seller I either strike out completely or get several accepted. So the average may be 2, but there is a wide distribution of outcomes with a lot of 0’s and some higher numbers mixed in.

At this point I am getting enough assets going into the top of my funnel so that I should be able to hit my goals for the number of assets that I want to close. Although I am still working hard to get more going in the top, which will allow me to find better pricing, and also to focus more on specific regions where I have teams in place. I encourage you to understand your note buying funnel so you can make sure you are on track to hit your goals.