It’s important to learn how to build a reputation as a great buyer and a great seller of notes. We’re covering best practices for both buying and selling real estate notes. Specifically, we’re going to focus on the etiquette.
Let’s begin with the best practices as a buyer.
It’s essential to make sure to put that the purchase funds are available at the time of the bid. Scrambling for capital to close a deal is a sure way to kill a relationship, and you’ll never get that opportunity again.
You’ll also want to make sure that it’s easy for the seller to evaluate your bids. In general, it’s best to make it easy for people to do business with you. Make it easy by sending bids in an excel file. With that bid, you want to present all pertinent information, not just the purchase price or the level of the bid but the seller’s loan I.D. and their servicer I.D. if they provide that in the data tape. As well as the last name of the borrower if provided.
It’s also customary to express the bid as a percent of the unpaid principal balance (UPDB). This will simplify the closing process because if any additional payments come in on a performing note or cash flowing note during due diligence, it’s going to change the bid. You don’t want to bid a note just using the dollar amount, which is frequently how inexperienced note investors do it. Note Sellers appreciate investors that submit bids on time as well. Mainly if there are other bidders involved in the trade, you know they may have critical dates that they need to follow as a seller, and due diligence can take longer than expected.
There are different parties and vendors involved, but only so much is within your control. Focus on being a good communicator. You will want to let the seller know where you are in terms of wrapping up due diligence, and if you need more time, let them know why you need more time. Closing when you say you’re going to close is critical. As mentioned earlier, that can be the end of a relationship. Sometimes, sellers need assets off the books by a specific time, making closing deadlines essential to good business. Make sure you close when you say you’re going to close.
Finally, sending the wire on time is key.
We’ve covered a lot of etiquettes here regarding the best practices for being a note buyer. Let’s move on to covering tips for note sellers.
The best note sellers tend to be the most organized with their data and with their collateral. This means the data they provide a prospective note buyer is accurate and current. Providing a comprehensive and precise data file when selling is like detailing your car before you sell it or cleaning your home before an open house.
You’ll get top dollar when the note shows well.
I’ve always used the term better data = better sales.
I want to explain a data tape and highlight some of the most important fields to include as a note seller to ensure you’re getting the best pricing from your note buyers. You’ll notice the lone identifiers tend to be the very start of the data tape to the far left, and that might include the loan number, the borrower name, it might even have a servicer I.D. as a second identifier in addition to the loan number. The street, city, and state, and any other information about the location of the property are to be included. When you’re selling a mortgage note, you want to provide the current principal balance identified as the UPB in many cases, and that’s the balance today. You also want to show right next to it the origination balance. What was the balance when the loan was first originated? Be sure to include information about the loan value and how much equity is in the property today and at the time of origination.
The term of the note is relevant because it tells you when the loan was originated, when the first payment date was, how much remaining term there is until the maturity. You want to know where the loan is at in terms of the amortization.
The first payment date and the next due date speak to the payment history. When did the borrower start making payments? What is the next payment due? These questions tell a lot about the history of the file and if it’s delinquent. Make sure that’s part of the data tape.
Identifying whether you’re selling a first or second lien is essential too. Don’t take it for granted that you know the buyer already knows this. Additionally, is the note a fixed rate or an adjustable-rate mortgage? Many loans in the market today are fixed, but when you have an adjustable-rate mortgage, additional data needs to be included.
Be sure to specify what the property type is. Is it a single-family home? Is it a condo? In some cases, it could be multi-family. Specify the property type, so the buyer is aware. Is it occupied, or is it vacant?
We’ve covered a lot of data here (the video above includes event more information). You can certainly get by with less information included on your data tape, but again, we’re talking about getting top dollar.